“I know from a common sense financial standpoint that something has to burst. When a country is losing billions and billions and billions of dollars a year and when other countries are making hundreds of billions of dollars, something is going to burst” That was businessman Trump on America’s trade deficit 27 years ago. It could be candidate Trump on the trade deficit today. The worry then, widely shared, was Japan. Now it is China. Now, as then, the worries are on the wrong side.
In the first half of the 1980s the dollar surged as a result of the Federal Reserve’s tight money to fight inflation. Partly as a consequence, Japanese imports poured into America and US companies lost market share. So pressured was America’s car industry that the Reagan administration forced Japan to agree to Voluntary Export Restraints. As the ill-fated Mr Takagi explained to John McClane in 1988’s Die Hard, “Pearl Harbor didn’t work so we got you with tape decks”
The Louvre Accord of 1985 ended this. Central banks worldwide agreed to boost their currencies against the dollar. Now, as the dollar/yen rate shifted the other way, Japanese capital poured into America buying iconic assets such as the Biltmore Hotel and the Mobil Building. There were worries about a “corporate Japanese takeover” of America.
And, in 1989, something burst but not, perhaps, what businessman Trump expected. To meet its Louvre Accord commitments the Bank of Japan brought its policy rate down from 7.44 per cent in November 1985 to 3.37 per cent in August 1987 and kept it there. This fuelled an asset price boom: in 1988 the land surrounding Japan’s Imperial Palace was said to be worth more than the whole of California. The Nikkei Stock Index rose from 22,621 in November 1987 to 38,130 in December 1989 when it accounted for more than one third of the world’s stock market capitalization.
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