Wow! Satyajit Das (on Nouriel Roubini’s EconoMonitor) walks the tightrope explaining what Japan and China are up to economically while avoiding Keynesian v. Hayekian hair-trigger-debate land mines (highly recommended):
Japan’s post war economic recovery and China’s more recent growth was based on an export driven model, using low cost labour to drive manufacturing. Both countries used under-valued currencies to provide exporters with a competitive advantage. Exports were promoted at the expense of household income and consumption. Both encouraged high domestic savings rates, which was used to finance investment. Both countries generated large trade surpluses which were invested overseas, primarily in US government securities, to avoid upward pressure of their currencies and to help finance purchases of their exports. Both also used high levels of investment financed domestically to drive economic growth.
The 22 September 1985 Plaza Accord forced Japan to revalue its currency in the appreciation of the yen, reducing Japanese exports and economic growth. In order to restore growth, policymakers engineered a credit driven investment boom to offset the effects of a stronger Yen, driving a bubble in asset prices that collapsed. Government spending and low interest rates have been used to avoid a collapse in activity exacerbating imbalances. This has resulted in large budget deficits, very high levels of government debt and enlargement of the central bank balance sheet, in part to finance the government and support financial asset prices.
China’s resistance to a sudden, sharp revaluation of the Renminbi is based on avoiding the Japanese experience. Turning Japanese: The Global Economic Trajectory?