"Ghosts of a summit past haunt the G20 in Seoul" from South China Morning Post

"As world leaders assemble in Seoul today for the G20 meeting, many will have a similar summit 25 years ago very much on their minds.

At first glance the two gatherings may not look similar. Back in 1985 only five countries were involved: the United States, Japan, Germany, France, and Britain."



"Immediately following the September 1985 agreement the yen rose rapidly against the US dollar, appreciating 12 per cent in just seven days of trading. As the first chart below shows, by the end of 1987, just over two years later, the yen had doubled in value against the US currency.

According to the plan, the stronger yen should have made Japan's exports less competitive while increasing Japanese consumers' appetite for imports, which should have reduced the size of Japan's current account surplus and brought the world economy back into balance.

But things didn't work out like that. Japanese exporters raised their game, and demand in the rest of the world for Japanese goods was undiminished. In yen terms, Japan's current account surplus barely changed. In US dollar terms, as the second chart shows, it almost doubled. The global economy remained as unbalanced as ever.

And the consequences for Japan were catastrophic. While the government embarked on financial deregulation, the Bank of Japan kept domestic interest rates low to counter the effect of currency appreciation. The result was an orgy of lending and a sharp increase in leverage which fuelled massive asset bubbles in the stock and property markets. The bust, when it came, was so severe it plunged Japan into its economic "lost decade" of the 1990s.

Today economist argue China could learn from that lesson and avoid the monetary policy mistakes Japan made following the Plaza Accord. But Chinese leaders have already learned a much simpler lesson: be wary of international agreements to appreciate currency."