The Internal versus External Dilemma: West German and Japanese Episodes

This chapter reviews how the monetary authorities of West Germany and Japan, as two balance of payments surplus countries, dealt with the internal vs external dilemma under the Bretton Woods system. The author argues that the fundamental problem in Japan’s economic policy-making towards the end of the Bretton Woods system was that Japanese economic policy-makers did not properly recognise that a sustained increase in productivityproductivity in the Japanese manufacturing sector was resulting in a significant strengthening of its international price competitivenessprice competitiveness under the fixed exchange rate system.