Under Fixed and Fluctuating Exchange Rates

From the early postwar years to August 1971, Japan maintained a fixed exchange rate against the dollar. After August 1971, and particularly after March 1973, both the dollar and the yen were on a fluctuating exchange rate standard, and generally rates were freely fluctuating in both Japan and the U.S. This system of freely fluctuating rates was modified, or changed, in September 1985 when the finance ministers of the five largest economies agreed to intervene to influence exchange parities. The content of the September agreement is unclear, perhaps deliberately so, and it is too soon to evaluate the effects of whatever change occurred. My comments are confined to the working of the fixed and fluctuating rate systems prior to the recent change. Most of my discussion concerns Japan. There are four reasons. First, Japanese monetary experience is less familiar to us than U.S. experience. The experience is very different, in part I believe, reflecting differences in policy. Second, and more importantly, Japanese experience offers some lesson