Managing International Financial Instability
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Managing International Financial Instability

National Tamers versus Global Tigers

Fabrizio Saccomanni

Recurrent instability has characterized the global financial system since the 1980s, eventually leading to the current global financial crisis. This instability and the resultant disruptions – sovereign debt defaults, exchange rate misalignments, financial market illiquidity and asset price bubbles – are linked, in this book, to the shortcomings of the global financial system which tends to generate cycles of boom and bust in credit flows. These cycles are set in motion by the monetary impulses of major industrial countries and are amplified and propagated through the operation of global financial markets. Fabrizio Saccomanni argues that to counter such systemic instability requires that national authorities give adequate weight to financial stability objectives when formulating their monetary and regulatory policies. He maintains that appropriate multilateral strategies to deal with unsustainable trends in credit aggregates and asset prices should be devised in the International Monetary Fund in the context of a strengthened framework to deal with global payments imbalances and exchange rate misalignments.
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Chapter 9: The resistible rise of the yen (1995)

Fabrizio Saccomanni


The experience and still-strong memory of wartime defeat and total subordination to United States policy during the occupation period greatly discouraged Japan from taking an active and visible role in international affairs. In that sense, international relations for Japan consisted to a great extent simply of our bilateral relationship with the United States. In those days the Japanese delegations to international conferences were ridiculed as the ‘triple S’ delegations: smiling, silent, sometimes sleeping. Toyoo Gyohten (Volcker and Gyohten 1992, ch. 2, p. 57) Mercantile disputes between Japan and the United States eventually led to the ‘syndrome of the ever-higher yen’. Incessant pressure – implicit and explicit – from the United States to make the yen appreciate from 360 to the dollar in 1971 to just 80 in 1995 is the historical origin of Japan’s deflationary psychology today. Ronald McKinnon (1999, p. 77) In 1995 the dollar fell to an all-time low against both the Japanese yen and the German mark. The record slump was the result of a number of concomitant causes, but the unsettled state of economic and trade relations between Japan and the United States was undoubtedly a key factor, against a background of highly volatile exchange rate relations between the dollar and the yen (Noland 1995; Lincoln 1999). The trend was finally reversed in mid-1995 thanks to a series of concerted actions by the G7 and following a trade agreement between the United States and Japan that put an end to a dispute that had lasted for...

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