Blowback, Second Edition: The Costs and Consequences of American Empire

Once the high yen–low dollar regime was in place, the U.S. government assumed that the trade imbalance would correct itself. The United States did nothing to end Japan’s barriers against imports and still permitted Japan to export into its market anything and everything it could sell there. Japan reacted to the high yen by putting its industrial policy system into high gear in order to lower costs so it could continue its export-led growth, even at a disadvantageously high exchange rate. The Japanese Ministry of Finance also lowered domestic interest rates to make capital virtually free and encouraged industrial groups to invest more vigorously than they had ever done before. The result was fantastic industrial overcapacity and a “bubble economy,” in which the prices of such things as real estate lost any relationship to underlying values. Business leaders proudly announced on American television that a square meter of the Ginza was worth more than all of Seattle. Ultimately, huge debts accumulated and the Japanese banks were stuck with at least $600 billion in “nonperforming” loans that threatened to bankrupt the entire banking system.

By 1995, the contradictions were starting to come to a head. Japan still had a huge surplus of savings, which it exported to the United States by investing in U.S. Treasury bonds, thereby helping fund America’s debts and keep its domestic interest rates low. And yet Japan itself was simultaneously facing the possibility of the collapse of several of its bankrupt banks. Financial leaders said to the Americans that they needed relief from the high yen in order to increase Japan’s exports. They hoped to solve their problems in the traditional way, via more export-led growth. Eisuke Sakakibara, then Japan’s vice minister for international affairs in the Ministry of Finance, readily acknowledges that he intervened with Washington to lower the value of the yen and admits to his “inadvertent role in precipitating one of the 20th century’s greatest economic crises.”⁶ The United States went along with this; facing reelection in 1996, Bill Clinton certainly did not want Japanese capital called home to prop up Japanese banks at that moment. As a result, between 1995 and 1997 the U.S. Treasury and the Bank of Japan engineered a “reverse Plaza Accord”—which led to a 60 percent fall of the yen against the dollar.

However, in the wake of the Plaza Accord, many newly developing Southeast Asian economies had by then “pegged” their currencies to the low dollar, establishing official rates at which businesses and countries around the world could exchange Southeast Asian currencies for dollars. So long as the dollar remained cheap, this gave them a price advantage over competitors, including Japan, and made the region very attractive to foreign investors because of its rapidly expanding exports. It also encouraged reckless lending by domestic banks, since pegged exchange rates seemed to protect them from the unpredictability of currency fluctuations. During the early 1990s, all of the East Asian countries other than Japan grew at explosive rates. Then the “reverse Plaza Accord” brought disaster. Suddenly, their exports became far more expensive than Japan’s. Export growth in second-tier countries like South Korea, Thailand, Indonesia, Malaysia, and the Philippines went from 30 percent a year in early 1995 to zero by mid-1996.⁷

Certain developments in the advanced industrial democracies only compounded these problems. Some of their capitalists had spent the post–Plaza Accord decade developing “financial instruments” that enabled them to bet on whether global currencies would rise or fall. They had also accumulated huge pools of capital, partly because aging populations led to the exceptional growth of pension funds, which had to be invested somewhere. Mutual funds within the United States alone grew from about $1 trillion in the early 1980s to $4.5 trillion by the mid-1990s. These massive pools of capital could have catastrophic effects on the value of a foreign currency if transferred in and then suddenly out of a target country. Fast-developing computer and telecommunications technologies radically lowered transaction costs while increasing the speed and precision with which finance capitalists could transfer money and manipulate currencies on a global scale. The managers who controlled these funds began to encourage investment anywhere on earth under the rubric of “globalization,” an esoteric term for what in the nineteenth century was simply called imperialism. They argued that excess capital should be allowed to flow freely in and out of any and all countries. Some economists argued that the free flow of capital was the same thing as the free flow of goods, despite mountainous evidence to the contrary.