Conquering the Fear of Freedom: Japanese Exchange Rate Policy since 1945 by Shinji Takagi (review)

This well-written and thoroughly researched history of Japanese exchange rate policy is a prime example of what Andrew Gordon once referred to as "postwar Japan as history."¹ It is a timely work, not only because of the uncharted waters in which Japanese policymakers find themselves at the beginning of the twenty-first century, but also because this important topic has been given so little attention in the historiographical literature. I surmise that the intricacies of monetary economics are partially to blame, but it remains a fact that, including in Japanese, a history of the topic has been long overdue. Itō Masanao's outstanding Sengo Nihon no taigai kin'yū, published in 2009, remains a lonely exception.

A word about the author is in order. The career of Takagi Shinji, an economist by training, is remarkably bound up with Japan's monetary position in the postwar world. As an academic (Takagi is professor emeritus at Osaka University), he published prolifically on the topic. Professionally, stints at the International Monetary Fund and Japan's Ministry of Finance gave him ample firsthand experience of both the political and economic aspects of monetary policymaking.

The latter leaves its trails in Conquering the Fear of Freedom. Much more than a descriptive history, the book is also an attempt at assessing the success, plausibility, and aptitude of the Japanese authorities in proceeding on what the author perceives as the (inevitable?) road to current and capital account liberalization. Although this will engage many a reader (it certainly did engage me), if only because it allows one to test one's own interpretations, this has, at times, had the unfortunate consequence of the author "reading too much" into the rich and complicated postwar policy environment. It is in this context that this review seeks to pinpoint some of the book's weaknesses and, at times, contradictions.

First of all, however, let us consider the postwar playbook as presented in the consecutive chapters. The book starts with a discussion of the byzantine exchange rate system that was introduced by the occupying authorities; this chapter is a perfect complement to existing descriptions of the political economy of the time.² Takagi puts these arrangements against the backdrop of the difficult domestic status quo that Japan faced in the immediate postwar years. As in other countries in this period, for example, France, the government position could be described as "unable to make distributional decisions during the … period, thus resorting to easy central bank financing of pork-barrel spending" (p. 10). The multiple exchange rate system catered perfectly to this mindset. By decoupling domestic prices from the foreign prices at which the GHQ of the Supreme Commander for the Allied Powers acquired or sold products abroad (typically, the yen was more appreciated for imports than for exports), it becomes clear how U.S. policy amounted to the granting of subsidies for both importers and exporters. One could compare this situation to a short-lived sakoku under U.S. auspices. The setup was profoundly political. Events in the domestic market did not translate into shifts in the balance of trade. Even in case of an external deficit (arising from massive U.S. help), the Japanese private sector made a net profit.

It is not difficult to see that the inflationary nature of these related arrangements, although untenable in the long run, must have been appealing to early postwar Japan's political constituency. Never purged on the scale of Germany, large chunks of the wartime bureaucracy and planned economy had been left in place and certainly profited from reconstruction efforts. This often forgotten "pro–status quo" aspect of inflationary policies will prove to be relevant for the twenty-first century context, as I discuss below. The tide was, however, soon bound to change. With the outbreak of the cold war, and the U.S. decision to "reverse course," new policies came to be aimed at stabilizing...