I am concerned that China could repeat Japan's mistakes in economic policy. In Japan's high-growth years, the yen became increasingly undervalued, pegged at 360 to the dollar, while the nation's productivity kept increasing. Exports were profitable and the manufacturing industries built up excess production capacities. Japan's trade surplus grew beyond an internationally tolerable level, leading to the 1985 Plaza Accords, which forced Japan to accept excessive appreciation of the yen and to expand domestic demand.
Theoretically, the yen's overvaluation should have reduced Japan's trade surplus in about two years, but that did not happen. Only in recent years did the trade surplus begin to decline through Japan's deindustrialization and closure of many factories. This process was painful, for production capacities existed in individual companies and supported many people's lives.
Continuous fiscal spending to stimulate domestic demand has created an economic structure in which the economy would collapse without annual budget deficits equivalent to at least 6 percent of gross domestic product. This is the basic cause of Japan's budget crisis.