Dollar and Yen: Resolving Economic Conflict Between the United States and Japan

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Dollar and Yen: Resolving Economic Conflict Between the United States and Japan

By Ronald I. McKinnon and Kenichi Ohno
MIT Press, 1997
266 pp. $39.50
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This book is written by economists mainly for economists, and is technically demanding. But much is comprehensible to non-economists. The authors examine the troubled U.S.-Japanese economic relationship over the last 40 years, explaining much of the tension in terms of different economic structures and perverse domestic economic policies, not malevolent Japanese behavior toward imports. It is worth reading for this interpretation. The important idea here is that the yen-dollar exchange rate, viewed by most economists and market participants as an adjusting variable that responds to diverse developments in the two domestic economies, is for Japan more significant as a forcing variable, causing other economic variables such as wages and prices to adapt to changes in it. This switch in interpretation leads the authors to propose that the United States and Japan act together to stabilize the yen-dollar rate in the neighborhood of 125 to one. To this end, monetary policy in each country should be targeted to stabilize the official index of wholesale or producer (not consumer) prices in the country, an approach that the authors argue will also stabilize the exchange rate. A radical suggestion, but cogently developed.