Understanding the Trump-Abe Meeting: A Historical Perspective
As President Trump and Japanese Prime Minister Shinzo Abe prepare to meet today, one might wonder what topics will dominate their conversation. Will they share anecdotes about the best fishing spots or discuss their favorite local bars? While these subjects seem more light-hearted, the reality is that their discussions will revolve around critical issues such as trade, economic growth, and employment policies that affect both nations. Additionally, they may explore strategies related to currency manipulation.
By the time you read this, news reports will likely summarize their key takeaways, and perhaps a new partnership will emerge from their talks. Anything could happen.
To better understand the significance of today’s meeting, it’s essential to revisit the economic history that has shaped the relationship between the United States and Japan. Here’s a brief exploration of the past three decades to provide context for their discussions…
In 1985, a critical misstep occurred at a pivotal moment in history. Despite the clear signals of economic turmoil, influential policymakers attempted to reshape the global financial landscape.
Fourteen years after Nixon abandoned the gold standard in 1971, floating currencies created severe imbalances in the global economy. As a result, a group of prominent officials convened at the Plaza Hotel in New York on September 22, 1985, perhaps unaware that they were unleashing significant changes. Between 1980 and 1985, the U.S. dollar had soared in value, appreciating by 50 percent against major currencies such as the Japanese yen and the West German Deutsche Mark.
American manufacturers argued they could not compete at such elevated dollar values while the U.S. faced a burgeoning trade deficit, which had ballooned to 3.5 percent of GDP. Clearly, a corrective policy was necessary.
A Troubling Trend
The Plaza Accord aimed to reduce the dollar’s value and restore balance to global trade. More crucially, it marked the first instance of central bankers intervening together in foreign exchange markets, prioritizing the global economy over individual national interests.
To a large extent, the Plaza Accord was deemed a success, as it led to a 51 percent decline in the dollar’s value against the yen from 1985 to 1987. By 1987, these nations gathered again in Paris to prevent additional dollar depreciation.
The subsequent Louvre Accord permitted the Bank of Japan to maintain a steady supply of yen in exchange for dollars. This shift triggered significant, unintended consequences in Tokyo.
The strengthening yen, coupled with the Louvre Accord, spurred expansive growth in Japanese money and credit. These economic policies inadvertently fueled the enormous asset price bubble in Japan during the late 1980s, followed by a prolonged period of deflation after the bubble burst.
For instance, property prices in Tokyo’s Ginza district peaked at $20,000 per square foot in 1989, only to plummet by over 90 percent by 2004. The Japanese stock market experienced a similarly drastic rise and fall…
In September 1985, the Nikkei 225 index stood at approximately 12,667. By December 29, 1989, it soared to 38,916—a staggering increase of over 207 percent. Today, however, the Nikkei 225 hovers around 19,300, more than 27 years later, reflecting an overall decline of more than 50 percent. For those who invested in stocks back in December 1989, it may take a lifetime to see any return on their investment.
As Japan’s asset prices skyrocketed, the economy entered a multi-decade stagnation. Despite extensive government spending, experiments with quantitative easing, direct stock market interventions via ETFs, and the implementation of negative interest rates, Japan has struggled to regain momentum.
Those in 1989 could hardly have predicted the length of this economic downturn. However, for astute observers, early warning signs were clear…
For instance, on January 8, 1992, after witnessing the collapse of Japan’s credit-induced asset bubble, President George H.W. Bush leaned in to whisper strategies for economic recovery to Prime Minister Kiichi Miyazawa during a visit. In a foreboding moment, though, he accidentally vomited on his lap. Japan’s economy has yet to bounce back from that period.
Intersecting Economies: Trumponomics and Abenomics
Japan’s economy, since then, has been, in many ways, a case study of economic mismanagement. Currently, Japan holds a staggering government debt ratio of 230 percent of GDP, the highest among industrialized nations. In comparison, the U.S. debt-to-GDP ratio stands at 104 percent.
Unlike the United States, Japan has primarily funded its debt from domestic sources. This approach has allowed Japan to avoid the pitfalls of foreign borrowing, largely thanks to its consistent trade surplus. With few exceptions, Japan has exported more than it has imported since 2012, with last year’s trade surplus reaching JPY 641.4 billion in December 2016.
Prime Minister Abe, the architect of the monetary policy known as Abenomics, has employed aggressive strategies to enhance exports by devaluing the yen. He believes that a weakened currency will offer Japan a competitive edge in the global market, enabling the country to import economic prosperity. Conversely, by depreciating the yen, he hopes to foster wealth through exports.
It’s debated whether Abenomics is working—at least in the short term. Japan has returned to a trade surplus; however, the long-term consequences of eroding citizens’ wealth may negate any short-lived economic benefits.
Meanwhile, the ongoing trade deficit between the U.S. and Japan is a significant point of frustration for President Trump, contradicting the aims of his economic policy. Instead of relying on imports from Japan, he aims to bring jobs back to American shores, effectively reversing the trend.
Thus, during today’s meeting, Trump is likely to seek an agreement with Prime Minister Abe akin to those he has forged in the past with various contractors. “You scratch my back, I’ll scratch yours,” might serve as his guiding principle. But what meaningful deal can they truly negotiate?
A sequel to the Plaza Accord appears unlikely. Nonetheless, there are other proposals in circulation. Ideas range from Japanese investment in Trump’s infrastructure projects to increasing energy imports from the U.S.
Will these agreements yield positive results? Can they foster economic growth for both nations? Only time will tell.
What remains clear is that current economic challenges, reflected in glaring trade imbalances, stem from the complexities of unbacked fiat currencies. Without the guiding principles of natural constraints, we find ourselves bemused by the chaos around us.
Ultimately, the intersection of Trumponomics and Abenomics is likely to contribute further to this economic tumult. One can almost guarantee it.
Sincerely,
MN Gordon
for Economic Prism
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