TY  - JOUR
AU  - Eichengreen,Barry
AU  - Hatase,Mariko
TI  - Can a Rapidly-Growing Export-Oriented Economy Smoothly Exit an Exchange Rate Peg? Lessons for China from Japan's High-Growth Era
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11625
PY  - 2005
Y2  - September 2005
UR  - http://www.nber.org/papers/w11625
L1  - http://www.nber.org/papers/w11625.pdf
N1  - Author contact info:
Barry Eichengreen
Department of Economics
University of California, Berkeley
549 Evans Hall 3880
Berkeley, CA 94720-3880
Tel: 510/642-2772
Fax: 510/643-0926
E-Mail: eichengr@econ.Berkeley.edu
AB  - We explore the parallels between Japanese currency policy after World War II and Chinese currency policy today. After two decades of pegging at 360 yen, Japan decoupled from the dollar on August 1971 and then repegged at a revalued rate of 308 yen.  After stabilizing the exchange rate at this new level for about a year, greater flexibility was introduced.  This phased adjustment - revaluation followed after a time by an increase in flexibility - bears more than a passing resemblance to recent Chinese policy initiatives.
We analyze the impact of Japan's exit from its peg on exports and investment.  The results point to sizeable effects of the yen's revaluation on both variables, especially investment.  While our analysis suggests that a rapidly-growing, export-oriented economy can operate a heavily managed float despite the presence of capital controls and the absence of sophisticated foreign currency forward markets, it underscores the importance of managing the exchange rate with domestic conditions in mind and avoiding the kind of large real appreciation that would sharply compress profits and damage investment.  
For China this suggests starting with a modest band widening and a limited increase in flexibility, and not with a large step revaluation which could have a sharp negative impact on investment and growth.  Our results thus provide support for the kind of measures taken at the end of July.
ER  -