Chapter 78 shoot the bird

After the Cold War, the strongest challenge to the United States came from her ally Japan, which had enormous economic power in world trade and banking.Under the watchful eye of its military protector, Washington, Japan carefully built up a great deal of economic power in the postwar period. In the late 1980s, Japan was considered the leading economic and financial power in the world.People are discussing "Japan can say no" and "Japan's economic challenges".American banks were in their worst crisis since the 1930s, and American industry became overindebted and less competitive.This is very detrimental to the establishment of the world's only remaining superpower.Of course, the Bush administration is aware of this.

Famous Japanese scholars and politicians, such as Takeshi Koji, are keenly aware of the special connotation of the Japanese model - "Japan has industrialized, but not Westernized."He noted: "Her capitalism is very different from the Western version of capitalism and is not based on a formal concept. She just selectively accepts the relationship with the state, economic wealth accumulation and technocracy. Rationalism-related concepts." Simply put, the Japanese model was allowed to exist as a counterbalance to China and the Soviet Union in Cold War geopolitics, but for Washington, the Japanese model was a big problem once the Cold War ended.Just how big the problem is, Japan will soon realize.

In the 1980s, no country was more loyal and active in supporting the budget deficits and excesses of the Reagan era than Japan, Washington's former foe.Even Germany has not expressed support for the US demands.In the eyes of the Japanese, Tokyo's loyalty, its generous purchases of U.S. Treasuries, real estate and other assets, paid off in the early 1990s with the most devastating financial collapse the world has ever seen.Many Japanese businessmen privately believe that this outcome was deliberately engineered by Washington to weaken the influence of the Japanese economy in the world.In the late 1980s, Harvard economist Lawrence Summers, who later served as Clinton's treasury secretary, warned of "the formation of an Asian economic bloc centered on Japan . . . felt that Japan might be a greater threat than the Soviet Union."

In September 1985, the official intent of the G7 Plaza Accord was to bring the overvalued dollar back to a manageable level.To achieve this goal, Washington put pressure on the Bank of Japan to take measures to strengthen the exchange rate of the yen against the dollar.A month after the Baker-Miyazawa agreement, between the Plaza Accord and the Louvre Agreement of February 1987, Tokyo agreed "to adopt monetary and fiscal policies that will help expand domestic demand and reduce external surpluses." Finance Minister James J. Baker had set the stage. Since Japan's most important export market is the United States, Washington can exert greater pressure on Japan, and it does.Backed by the Omnibus Trade and Competition Act of 1988, Washington listed Japan's "hostile" trade practices and demanded major concessions from her.

By 1987, the Bank of Japan cut interest rates to a low of 2.5%, where they remained until 1989.Interest rates were lowered to encourage more purchases of American goods, but it didn't work.As an alternative, these low-cost funds quickly found a way to make quick money, investing in the rising Tokyo stock market, and soon formed a huge bubble.Although Japan's domestic economy has been stimulated, the most important thing is the rapid rise of the Nikkei and Tokyo real estate prices.As a preview of the ensuing "new economy" bubble in the United States, the stock price of the Tokyo stock market rose by 40% in one year, and the prices of real estate in Tokyo and its surrounding areas also rose, in some cases reaching 90% or even higher. It was like a new gold rush hitting Japan.

Within a few months of the Plaza Accord, the yen appreciated sharply, from 250 yen to the dollar to 149 yen to the dollar.In order to make up for the impact of the yen on export prices, Japanese export companies have turned their funds to financial speculation, which can reduce part of the currency losses caused by foreign trade sales. This is the so-called "financial technology".Japan became the world's largest banking center overnight.Under the new international capital rules, Japanese banks can count their long-term stakes in their affiliated companies, the General Shoji System, as core assets of banks.As the par value of these companies' shares rose, so did the bank's capital.

By 1988, the stock bubble continued to inflate, and the 10 largest banks in the world were all Japanese banks.Japanese capital seeped into U.S. real estate, golf courses and luxury resorts, into U.S. government bonds and even the riskier U.S. stock market.The Japanese quickly poured the inflated yen into dollar assets, fueling the ambitions of George Bush to become president, who succeeded Ronald Reagan in 1988.New York financier George Soros said of Japan's success in the 1980s: "...the prospect of Japan emerging as the world's dominant financial power is disturbing..." But the Japanese exuberance at becoming a world financial giant was short-lived.Japan's bloated financial system, along with currency-shocked banks, led to one of the world's largest stock and real estate bubbles, with the Nikkei tripled in the space of three years after the Plaza Accord.Real estate values ​​have also risen, indirectly reflecting Japanese bank lending.At the peak of Japan's economic bubble, the total value of real estate in Tokyo was even higher in dollars than the total value of real estate in the entire United States.The nominal value of all stocks in Tokyo's Nikkei stock market accounts for even more than 42% of the world's stock value, at least on par.But that didn't last long.

By late 1989, with signals in Europe of the fall of the Berlin Wall, the Bank of Japan and the Japanese Finance Minister began a cautious effort to slowly deflate the feared Nikkei stock bubble.Once Tokyo began to cool off the speculative boom, Wall Street's major investment banks began using exotic derivatives and financial instruments, dominated by Morgan Stanley and Salomon Brothers.Their intervention led to panic selling in an already orderly cooling of the Tokyo market, with Wall Street bankers profiting handsomely by shorting the Tokyo stock market in the process.As a result, the idea of ​​slow, orderly adjustments intended by the Japanese authorities was out of the question.

By March 1990, the Nikkei had plunged 23% from its peak, wiping out more than one trillion yen in stock market value.Officials of the Japanese government privately recalled that in May 1990, the Interim Committee of the International Monetary Fund held a meeting in Washington. At the meeting, Japan’s proposal to finance the economic reconstruction of the former Soviet Union aroused heated debates and was rejected by Washington and the Treasury Department of the Bush administration. Strongly disagree.They believe that meeting may have been a behind-the-scenes reason for Wall Street's speculative attack on Tokyo stocks.They only got part of it right.

A report submitted by Japan’s Ministry of Finance to the International Monetary Fund believes that after the end of the Cold War, hundreds of billions of dollars will be needed worldwide to invest in new railways and other economic infrastructure. Japan’s large foreign trade surplus is not like that of Americans. Having said that, it's not a problem at all.Japan proposed the famous MITI model for transforming the pre-communist economy.Washington lacked enthusiasm and didn't care.In the MITI model, the government plays a very important role in guiding the development of the national economy.The success of this model in South Korea, Malaysia and other East Asian countries is enough to prove the feasibility of this model.When the Soviet Union collapsed, many countries began to turn to the Japanese and Korean models as an alternative to the American free market model.This was a major threat to Washington's plans as the Cold War drew to a close.

The Bush administration is in no rush to replace Japan as the protagonist in rebuilding the economies of Eastern Europe and the Soviet Union.Washington has its own plans for dealing with its enemies during the Cold War, and the establishment of a Japan-Soviet economic bloc funded by Japan is not on the agenda.In order to regain the initiative, Bush sent his Secretary of Defense, Dick Cheney, to Tokyo in early 1990 to "discuss" a significant reduction in the U.S. troop presence in the periphery of the Asia-Pacific region. Concerns about military security rose.Cheney's barely concealed extortionate visit comes on the heels of Japanese Prime Minister Toshiki Kaifu's visit to Western Europe, Poland and Hungary in January to discuss economic development in former communist countries in Eastern Europe.The signal was clear -- "Do what Washington says, or your security will not be guaranteed." In March of that year, when he met with the President of the United States in Palm Springs, the Japanese Prime Minister understood the intentions of the United States.Japan is not trying to compete with the dollar in Eastern Europe.In a matter of months, Japanese stocks have lost nearly 5 trillion yen in face value.Japanese companies were hit hard.Talk of Japan challenging US financial plans is no longer heard in Eastern Europe.Economists in Washington declared the end of the Japanese model.In private, politicians in Tokyo often use a geese metaphor, in which Japan is like a lead goose flying ahead, with other smaller East Asian nations following behind.By 1990, Washington had seriously injured the leading goose.Now the US is turning its attention to the geese that follow this goose - the tiger economies as the second phase of its New Dollar Order. The debate between Japan and the IMF can be found in the World Economic Outlook (IMF, May 1990, p. 46).The spin-off action on Wall Street that hastened the decline in the Tokyo stock index is explained by unrecorded conversations with market participants to the author. In January 1990, in a private letter, David, an economist at CA Financial Services.Hull comments on the strange conflict displayed by Washington's Japan policy at the time.Hull's point: The U.S. Treasury demanded that Japan liberalize its capital markets and abolish financial cartels... The U.S. must recognize that Japan's capital inflation induced by monetary policy in the final years of Reagan's administration was partly underpinned by American financial markets, combined with the rapid liberalization of Tokyo's markets, may have inadvertently contributed to a global financial crisis. Jeffrey Miller helpfully details the aftermath of events from the Plaza Accord to the bursting of the Tokyo bubble.Charles Johnson, one of America's leading experts on Japan, offers a simple analysis of the American perspective on the threat to the postwar Japanese economy.Also see Takeshi Takeshi Koji's official report on the origins of the Asian crisis and its impact on the East Asian economy, Lawrence's article on the origins of the Asian crisis, "American Hegemony and the Asian Financial Crisis," submitted to the Forum on the Origins of the Asian Financial Crisis in 1999.