The Misalignment of the U.S. Dollar and the Japanese Yen: The Problem and Its Solution

by Ezra Solomon, David Murchison


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Fall 1984

Volume 27
Issue 1


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Abstract

The article focuses on the misalignment of the U.S. dollar and the Japanese yen as of September 1984. Recent trends in the two factors, notably, the sharp and continuing rise of the dollar in the face of sharply rising trading deficits, clearly indicate the need for a re-examination of dollar's exchange rate as a policy variable. The principal cause of the growing U. S. trade deficit is a misalignment between the dollar and other currencies, particularly the Japanese yen. The value of the yen has fluctuated in the ten years since the present system of floating rates was established. It recorded a peak of 175 yen to the dollar on October 31, 1978, and presently stands at approximately 244 yen to the dollar. At a level of 244 yen to the dollar, the yen is undervalued and the dollar overvalued. Other currencies also have depreciated significantly against the dollar in recent years and, as a result, the dollar is misaligned against currencies besides the yen. The misalignment between the yen and the dollar, however, is of critical importance to the U.S. because of the unique intensity of competition between the U.S. and Japan. Both nations should strive to speed up developments to sort out the crisis. An exchange-rate adjustment achieved within the context of free markets in goods, services and capital will provide a far superior solution to growing imbalances in U.S.-Japan trade than can be obtained through artificial restraints based on quotas, tariffs, or so-called industrial policies.

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