China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience
18 Pages Posted: 8 Jun 2006 Last revised: 26 Aug 2008
Date Written: May 2006
For creditor countries on the periphery of the dollar standard such as China with current account surpluses, foreign mercantile pressure to appreciate their currencies and become more flexible is misplaced. Just the expectation of variable exchange appreciation seriously disrupts the natural tendency for wage growth to balance productivity growth and thus worsens the (incipient) deflation that China now faces. It could create a zero-interest liquidity trap in financial markets that leaves the central bank helpless to combat future deflation arising out of actual currency appreciation, as with the earlier experience of Japan. Exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable effect on the trade surpluses of creditor economies.
Keywords: exchange rate, current account, China, Japan
JEL Classification: F31, F33, F42
Suggested Citation: Suggested Citation