By Mark J. Ravina, University of Texas
Two years after the meetings between Richard Nixon and Eisaku Satō, Japan and the United States eventually did reach an agreement on voluntary export limits, but it was not pretty. The tension over the reversion of Okinawa and textile exports shaped Nixon’s next two major policy shifts—abolishing the Bretton Woods agreement and his trip to China.
Nixon’s Announcement of the Trip
In July 1971, Nixon announced that he would travel to China and meet with Mao. You don’t need to be a history buff to be fascinated by this. Nixon had been a Joe McCarthy-flavor anti-communist and Mao had been a ferocious anti-capitalist. Perhaps for those reasons, the Nixon-Mao meeting looms large in popular culture.
Now, the US-Chinese thaw was based largely on a common dislike of the Soviet Union. But, what did all of this mean for Japan? What did Tokyo make of Nixon’s trip? In Japan, Nixon’s announcement was an utter shock. The government received neither an advanced notice nor a request for input. This was painful because the state of US-China relations had a direct impact on Japan.
Japan had signed a peace treaty with Taiwan in 1952 but that agreement was supported by a mutual interest against communism. So, it’s not that surprising, then, that Taiwan waived all rights to reparations. But what about Mao? How would Satō approach Mao?
End of the Bretton Woods System
And then, in August 1971, Nixon declared that the United States was abandoning a gold-backed US dollar and fixed exchange rates—the cornerstones of the Bretton Woods international economic system. Instead, currency rates would be set by what’s known as ‘dirty floats’—mostly market rates with some central bank intervention to keep currencies in a predictable range.
Now, Nixon’s policies were not directed solely at Japan. It was French president Charles de Gaulle who had arguably broken the Bretton Woods system by regularly demanding that dollars be converted to gold. Because the price of gold was artificially low at the time, those demands amounted to a slow run on Fort Knox. Still, the impact of the end of Bretton Woods on Japan was huge.
For ¥360 to the dollar—the dollar quickly fell to around ¥260, and it continued to fall for years. Since the 1990s, the dollar has floated mostly in the range of ¥80 to ¥130. So, a key effect of the end of the gold standard was the end of artificial US support for the Japanese economy—and that caught Satō by surprise.
This article comes directly from content in the video series The Rise of Modern Japan. Watch it now, on Wondrium.
Different Views on Japan’s Situation
And then, in another shock to the relationship, Japan became a target of the 1973 oil embargo because of its alliance with the United States. Soaring oil prices triggered a brief interval of massive inflation—cresting above 20% in 1974. Rising energy costs forced Japan’s economy into a short, but deep, recession, with industrial production contracting by about 20%. Combined, all of those shocks created a sense that Japan was terribly vulnerable.
Here’s an example from pop culture. In 1973, the science-fiction novel, Nihon chinbotsu (Japan Sinks), became an unexpected bestseller. In it, a massive earthquake fault begins to swallow the entire archipelago of Japan. The book was a huge hit. It won a major book prize and was quickly turned into a TV movie. The initial success of the book had nothing to do with a natural disaster. Instead, the novel captured Japan’s sense of vulnerability after the Nixon Shocks and the oil crisis.
And the US view was similar, if not as spectacular. Japan seemed fragile, despite its growing prosperity. The foreign policy analyst Zbigniew Brzezinski penned a 1972 analysis titled, Japan: The Fragile Blossom. And in 1975, long-time Japan watcher Frank Gibney published Japan, the Fragile Superpower. So, fragile was the word of the day.
Japan: Going against Predictions
But despite all that talk of fragility, Japan’s economy didn’t collapse, and it didn’t sink into the ocean. On the contrary, in the 1980s, Japan looked like a terrifying economic colossus, not a fragile blossom. Its economy seemed unstoppable, and it looked like Japanese investors were going to buy up the world. So, what happened?
The short story is that the Japanese industry adapted quickly to new realities. With the end of the cheap yen, manufacturers gave up on cheap exports and went for higher profit margins from higher-tech exports. And with more expensive energy, Japan made its manufacturing more energy-efficient. And with some restrictions on Japanese exports, Japan began moving factories to the United States.
Think of Honda. Its Civic was a huge success in the 1970s because it was fuel-efficient and met US emissions standards. But, Honda also began planning its luxury line, Acura, to make more money on each car while staying within limits on total automobile exports. And Honda began opening plants in the US to blur the line between domestic and imported cars.
So, rather than crush the Japanese economy, the Nixon Shocks, Nixon’s trip to China, and the oil crisis prompted a transformation.
Common Questions about How Nixon’s China Trip Worked in Favor of Japan’s Economy
Nixon’s trip to China came as a shock to Japan. The Japanese government received neither an advanced notice nor a request for input, and this was painful for them since the state of US-China relations would have a direct impact on their country.
In August 1971, Richard Nixon declared that they were abandoning the gold-back dollar as well as fixed exchange rates—the cornerstone of the Bretton Woods international economic system. As a result, the Japanese yen experienced a drastic continuous drop against the US dollar.
The Japanese industry quickly adapted to the bitter new realities. Manufacturers gave up cheap exports and pursued higher profit margins from exports and technology. As energy became more expensive, Japan made its production more efficient in this regard. And after facing export restrictions, Japan began moving its factories to the United States.