‘Nixon shock’ still haunts Japan: ex-financial diplomat Gyoten

TOKYO — When U.S. President Richard Nixon decided in the summer of 1971 to suspend the dollar’s convertibility into gold, the postwar system of fixed exchange rates that pegged the yen at 360 to the greenback collapsed, throwing the Japanese economy into turmoil.

Toyoo Gyoten, honorary adviser to the Institute for International Monetary Affairs, a Tokyo-based think tank, and a former Japanese Vice Minister of Finance for International Affairs, discussed the legacy of the “Nixon shock” in an interview with Nikkei. Gyoten, who also worked at the International Monetary Fund and the Asian Development Bank, is one of Japan’s foremost experts in postwar “foreign exchange diplomacy.”

“The trauma still exists in Japan,” Gyoten said of Nixon’s decision to abandon the gold standard, “and politicians and business people remain allergic to the yen’s appreciation.” He believes, however, that Japan has become less nervous about fluctuations in the yen’s value. The country, he believes, should work to make its economy less sensitive to exchange rate volatility.

Recently there has been much talk of the yuan displacing the dollar as the world’s main reserve currency. But Gyoten argues that China has little scope to increase the liquidity of its currency, which he believes is unlikely to assume the dollar’s role.

Edited excerpts of the interview follow.

Q: How did the “Nixon shock” affect Japan?

A: The world economy was revived over the quarter of century following the end of World War II under the Breton Woods System, which made the gold-backed dollar the world’s key currency. The mechanism collapsed and brought an end to the postwar era.

I should say the timing was good for Japan because it had achieved economic recovery by then through [Prime Minister Hayato Ikeda’s] income-doubling policy and other measures. Nevertheless, Japan’s economic growth peaked out in the 1970s. Until then, the Japanese economy had been in a fortunate position, thanks to the availability of inexpensive oil and long-term loans from the World Bank and support from the fixed exchange rate system, which kept the yen low.

Then floating-rate system was introduced, and oil prices rose as a result of the global oil crises. The revaluation of the yen gravely affected Japan, which depended on exports for growth. The trauma [of the revaluation] still exists, and politicians and business people remain allergic to the yen’s appreciation.

Q: Although Japan’s economic structure has changed, “high yen phobia” continues. Why?

A: Since the end of World War II, the Japanese economy has almost continuously relied on automobiles, machinery and other export-oriented industries. As a result, Japanese people have fallen into the habit of seeing exchange rates from the side of exports.

When trade friction arose between Japan and the U.S. in the 1980s, furthermore, the U.S. launched negotiations, recognizing that the yen’s appreciation was Japan’s Achilles heel. Japan’s currency diplomacy aimed to maintain the yen’s relative weakness.

Ideally, countries hope that their currencies will be stable over the long term. But that doesn’t occur because of differences in their growth rates and prices.

Japan has become less sensitive to the yen’s depreciation and appreciation than in the past, possibly because the understanding of exchange rates has advanced now that roughly half a century has passed since the switch to the floating-rate regime. It is good that interest in exchange rates has weakened, and Japan should further promote a shift to an economic structure that is unaffected by the yen’s exchange rates.

Q: Will the dollar’s hegemony continue?

A: The U.S. remains No. 1 in the world in terms of its relative strength. National power is the sum of a country’s economic, military and technological strengths, as well as other factors, including culture and ideals. The growth of Japan and Germany was noticeable in the past, as is China’s now. But there is no country that can replace the U.S.

There remains little room for China to further increase the liquidity of the renminbi (yuan) which, therefore, appears unlikely to take over the role of key currency from the dollar. But well aware that countries such as Russia and Iran are suffering under dollar-based financial sanctions, China will continue trying to reduce the reliance of international capital transactions on the dollar.

Q: What will happen to the yen’s status?

A: There is no doubt that use of the yen in trade and other commercial dealings and capital transactions, to a certain extent, is beneficial to Japanese companies and investors. It is important that the yen continue to be positioned as a major currency in the world. To this end, efforts are needed to ensure that Tokyo is seen as a market offering profitable business opportunities, to increase use of the yen.

Q: The amount of currency in circulation keeps expanding. What are your thoughts on this?

A: Finance is essentially a public good and helps keep the real economy, such as corporate production activities, running smoothly. But the increasing issuance of currencies that have lost the backing of gold has turned finance itself into a huge industry that generates employment and profit.

Finance has thus greatly expanded its share of the economy. Swollen finance has created fears of bubbles forming and bursting everywhere. And widening inequality has become unstoppable. Although we try to eliminate risks created by the changed nature of finance with all the wisdom we have, the task is not as easy as it sounds.


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