Many Chinese respond worriedly to calls to raise the yuan by looking back at the Plaza Accord of September 1985, after which the value of the yen rose more than 60 per cent, from 240 to the US dollar to less than 150, within two years.
After five years of strong growth and surging stock and real estate markets, in 1990 Japan was forced into a painful 20-year adjustment.
For many Chinese, there was a causal connection between the two events. The post-1985 rise in the yen, they believe, caused the bubble whose subsequent collapse ended Japanese growth and threw the country into a lost decade.
This view is mistaken. What is worse, to the extent that it affects Chinese policy it almost certainly increases the chances that China will suffer its own lost decade.
It was not the post-1985 rise of the yen that caused Japan's lost decade. Tokyo had waited so long before the inevitable currency adjustment that policymakers were then forced to choose between a sharp slowdown and a disastrous policy response. They chose the latter.
For Japan in the mid-1980s, a sharply undervalued currency and extremely low interest rates had helped to generate tremendous growth in the previous 15 years. But as in China today, this growth came with low and declining household consumption as a share of GDP. This left Japan extraordinarily dependent on investment and on a large trade surplus to generate growth.
Once it became clear, however, that the rest of the world, especially the United States, was unable to absorb Japan's rising trade surpluses, in 1985 under threat of trade sanctions Tokyo allowed the yen to soar in value against the dollar.
