Andy Xie

Opinion | China must draw the right lessons from Japan’s trade war with the US, and develop its technology

The Plaza Accord, which pushed up the yen, didn’t break the Japanese economy, which was in a good place to begin with. But China, which has a lower average income, can’t afford to make the same policy mistakes as Japan

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President Xi Jinping is shown around the London offices of Huawei Technologies by founder Ren Zhengfei. In China’s power structure, more have a vested interest in keeping asset prices stable than in developing proprietary technologies. But the US trade war and ban on Huawei may have changed the dynamics somewhat. Photo: Reuters

Andy Xie

Published: 1:00am, 20 Jun 2019Updated: 3:36am, 20 Jun 2019

The United States’ trade war with China reminds people of a similar episode between the US and Japan in the 1980s. Ironically, Japan’s ruling elite have been telling the Chinese in private for many years that the US would do the same to China one day. The current situation seems to vindicate the Japanese pessimism, which makes the lessons from Japan highly important to China’s strategic thinking. Unfortunately, the wrong lessons could be drawn.

Many Japanese experts believe the damage was caused by the US pushing up the yen and bursting Japan’s property bubble. There are a number of inaccuracies in this commonly held view. Japan’s property bubble was largely a consequence of its fixed exchange rate.

For decades, Japan’s exchange rate was fixed at or around 360 yen to the dollar, as it was building an export-led economy. When an economy grows its exports rapidly, its exchange rate should appreciate to reflect its rising competitiveness. When the exchange rate is fixed, the money supply will rise faster, instead, to reflect productivity gains.

The East Asian experience has shown that this always leads to a property bubble. Many experts, even in the US, thought then that Japan was different, that its crazy stock and land prices reflected a different economic model, not a crazy bubble.

The Plaza Accord, signed by Japan in 1985, almost doubled the yen’s value. In hindsight, the yen was fairly valued afterwards. Japan’s exports continued to boom. So did its property market. Japan’s asset bubbles eventually collapsed under their own weight: first the stock bubble in 1990 and then the property bubble in 1992.

The collapse of Japan is another inaccurate myth. Its property market did crash. Its economy didn’t – it merely stagnated. Its per capita GDP has remained around US$40,000, hardly a disaster by any standard. It has fallen behind the US, whose per capita gross domestic product is now around US$60,000. Then again, the US’ premium could be a bubble.