China faces mounting pressure to revalue its allegedly undervalued yuan. I am concerned that China could repeat the mistakes that Japan made in exchange-rate policy. China can learn much from Japanese experiences in economic management and currency diplomacy.
What were the mistakes made in Japan's economic management?
When a new industrial power continues to increase productivity through active investment, its currency tends to become undervalued, as was the case with the yen in Japan's high-growth era. It made it possible for Japan to develop an enormous production capacity that far exceeded domestic demand. This is how an intractable supply-demand gap came into being, which Japan has had to fill with exports and fiscal spending.