The New Taiwan dollar’s sharp rise against the US dollar on Friday last week and on Monday raised concerns over the capital market and export competitiveness. Some — like Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) — even drew parallels to the 1985 Plaza Accord, a deal between the US, Japan, West Germany, France and the UK that facilitated a coordinated weakening of the US dollar. From a political economy perspective, while the situations do bear certain similarities, equating the two overlooks fundamental differences between Taiwan and Japan with regard to economic structure, policy responses and foreign exchange controls.
The Plaza Accord was a currency intervention mechanism jointly signed by the US, Japan and major Western allies in response to pressure from mounting global trade deficits. The goal of the accord was to intentionally depreciate the US dollar to improve the US’ export situation. The yen appreciated by as much as 50 percent as a result. To offset the impacts of appreciation on export industries, Japan adopted a substantially loose monetary policy and significantly cut interest rates. This led to an overabundance of capital, and formed stock and real-estate market bubbles. When the bubbles popped, Japan entered a prolonged period of economic stagnation and deflation, often referred to as the “lost decades.”
By contrast, Taiwan’s central bank and the Executive Yuan implemented a series of swift and stable policies in 1987 — avoiding interest rate cuts, establishing capital controls, limiting property loans, strengthening credit management, encouraging the outflow of industrial capital and promoting overseas investment. These measures effectively mitigated domestic capital pressure and speculative asset price inflation.
Was the latest appreciation of the NT dollar caused by the same external political pressure faced back then? Central bank Governor Yang Chin-long (楊金龍) said that Taiwan faces no such pressure from the US, and there is no framework for any relevant bilateral agreement. However, there is evidence of hot money inflows into the foreign exchange market, heightened expectations and even manipulation by “vultures” — individuals or entities who take advantage of volatility or crises in foreign exchange markets for profit. These signs point to short-term speculative capital flows, not the recurrence of an international currency war.
In the long term, Taiwan must remember that should the US — in an effort to support its own export industry and revive domestic manufacturing — acquiesce or promote the long-term depreciation of the US dollar, the NT dollar could continue to face structural pressure from appreciation down the line. In absence of a formal agreement, such pressure would greatly affect Taiwan’s export sector and capital markets.
To handle such a situation, Taiwan can look to historical experiences for valuable policy insights. A solid first step would be to strengthen capital market regulatory mechanisms by implementing risk identification measures for short-term speculative capital and hot money flows.
Second, Taiwan should promote capital internationalization by providing incentives for businesses to expand and invest overseas, thereby easing domestic capital pressure. It should also promote green and high-tech transformations by channeling foreign capital to invest in research and development to avoid forming asset bubbles.
The last step is to maintain a moderate exchange rate management flexibility — room should be preserved for central bank intervention within a free-floating exchange rate system to prevent volatile exchange rate fluctuations.
Taiwan’s present-day economy is significantly different from that of the 1980s — its industrial system, foreign exchange reserves and position in the global value chain are far more advanced than before. So long as policy responses remain stable and rational, the public need not be carried away by the mentality that equate currency appreciation to a crisis.
Wang Hung-jen is a professor in the Department of Political Science at National Cheng Kung University.
Translated by Kyra Gustavsen
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