Japan feared that the deal with America would cause its growth to suffer; China fears the same about the absence of a deal
HISTORY IS NEVER far from China’s mind in its trade dispute with America. A few months ago, when negotiations looked on track, staunch nationalists warned of echoes with the “unequal treaties” that foreign powers had forced upon China in the 19th century. In recent weeks the breakdown in talks has led state propagandists to draw comparisons with the Korean war of the 1950s, a bloody struggle between China and America. But the analogy that haunts Chinese economists does not involve China itself.
The case against the Plaza Accord is that it set Japan on a path to doom. To counter the effect of a strong yen, an obvious drag on exports, Japan slashed interest rates and unleashed fiscal stimulus. These moves brought about an economic rebound. But they also generated asset bubbles: stock and land prices tripled within five years. In 1990 these bubbles burst and the economy slumped, never to recover its former mojo.
As the International Monetary Fund has argued, there were at least two other factors that could have led to a different outcome. Excessive stimulus, by itself, did not guarantee that Japan would suffer an asset bubble. It was that much more dangerous when combined with financial deregulation, which led banks to lend more to property developers and homebuyers. And the bursting of the bubble did not guarantee that Japan would suffer a lost decade, let alone three.
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