In the 1980s, the US suffered from a huge trade deficit with Japan and Germany. In the case of Japan, Reagan thought that it was because the Japanese were intentionally keeping the Yen low against the U.S. dollar. He demanded Japan to raise the Yen against the dollar or devalue the dollar against the Yen. Thus, starting from over Y250 to a dollar before 1985, the exchange rate move to round Y150 to a dollar in 1986 and finally to less than Y125 to a dollar in 1987.
It was not that the Japanese were not willing to buy more goods from the US after the devaluation of the U.S. dollar. What was wrong was that devaluation alone was not enough to correct the trade deficit.
Burstein also said that devaluing the dollar could have been a powerful tool in promoting U.S. trade competitiveness if it were linked to government support for export industries, credits for trade financing, tax incentives for restructuring domestic industry, and a control mechanism to prevent business from squandering the currency advantage on price hikes. He added that those ideas stood in contradiction to the Reagan’s administration’s basic article of faith; let the free market decide.
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