The International Monetary Fund says Japan's experience with the yen's sharp appreciation after the 1985 Plaza Accord should help it prevent stimulus measures aimed at mitigating the impact of currency appreciation from giving rise to asset bubbles.
Taking the stance that emerging countries like China should narrow their current account surpluses to correct global imbalances, the IMF said in its World Economic Outlook report Wednesday that currency revaluation could play a significant role.
It is also important to withdraw stimulus at an appropriate time to prevent economic bubbles like the one Japan developed in the 1980s, it said.
"Japan's experience highlights how hard it is to time the withdrawal of macroeconomic stimulus intended to offset the effects of currency appreciation," the IMF said. "By the late 1980s, Japan's economy was once again booming and asset price bubbles were beginning to form, but tighter monetary policy was not implemented."
In September 1985, the Group of Five — Britain, France, Germany, Japan, and the United States — announced they would coordinate foreign-exchange policies to get the yen to appreciate against the dollar in response to the widening of Japan's current account surplus.
To cope with the yen's subsequent appreciation, Japan boosted public spending and eased its monetary grip but waited too long to terminate the measures, resulting in slower growth in the end, it said.
From 1987 to 1989, the Bank of Japan's policy rate was about 4 points lower on average than appropriate, it said.
"Tighter policy could have restrained rapid domestic demand growth, helped reduce the still-sizable external surplus via further appreciation of the yen, and headed off incipient asset price bubbles," the IMF said.