The Yo-Yo Yen and the Future of the Japanese Economy, by Brendan Brown. New York: Palgrave. 2002. Cloth, ISBN 0333929497, $65.00. 259 pages.
Concerned about the impact of persistent labor market stagnation on his re-election prospects, President George W. Bush's October 2003 Asian trip agenda included pleading with Japanese officials to strengthen the yen and requesting that China revalue its 8.28 yuan per dollar pegged exchange rate to help stimulate U.S. exports. As has often been the case since the collapse of the Bretton Woods regime in the early 1970s, neither Japanese Prime Minister Junichiro Koizumi nor Chinese President Hua Jintao acceded to these requests because they also faced political pressures to increase employment in their countries.
To what degree has political intervention affected currency markets and economic activity? According to Brendan Brown in The Yo-Yo Yen, pressure from the United States on Tokyo to raise the value of the yen and lower the U.S. trade deficit was not the primary cause of heightened exchange rate volatility during the last twenty years. Rather, Brown argues that monetary policy errors--especially after the Japanese stock market and real estate bubbles burst in 1990--were the main culprit. He claims that the dramatic swings in the value of the yen since the early 1970s have lowered global welfare by discouraging the Japanese from investing the country's huge savings surplus overseas and instead squandering it on low-return private investment and on unneeded public projects that did little to lift the economy from its doldrums. Given that most research about the "lost decade" in Japan has focused on the domestic impact of economic stagnation, an analysis of its global repercussions is most welcome, and Brown's hypothesis is an intriguing one. Unfortunately, I believe that Brown got sidetracked in his attempt to place Japan's recent experiences in historical context, which distracts readers from the more interesting points he makes on policy over the last twenty years.
Eschewing econometrics based on abstract theory, Brown employs what has become known as the narrative approach in a way that somewhat resembles Milton Friedman and Anna Jacobson Schwartz's A Monetary History of the United States, 1867-1960. Perhaps this is unsurprising since Brown did his graduate work at the University of Chicago. One similarity is that both books describe monetary policy and attempt to explain the behavior of monetary...