The new Chief Economist at the IMF, Maurice Obstfeld, posed a challenging question at the end of his first major policy conference in charge last week: “Is China the new Japan?” This question has been asked before, usually in the context of the massive credit bubbles in the two economies. The deflationary lessons from Japan’s imploding bubble in the 1990s are often thought to be relevant to China’s credit bubble in the 2010s, and this story is far from over.

Maurice Obstfeld, however, had something more specific in mind. He cited the work of the late Ronald McKinnon, a distinguished international economist who argued in the 1990s that Japan was being forced into deflation by an overvalued exchange rate. That, in turn, stemmed from the political pressure exerted on Japan to correct its current account surplus by raising the value of the yen. The implied threat, notably (but not solely) from the US Congress, was that direct trade controls would be imposed on Japanese exports if the exchange rate were “artificially” held down.

China has been subjected to similar threats from the US and others in recent years, and has responded by allowing the inflation adjusted valuation of the renminbi to rise by 60 per cent in the past decade. Even in the last 12 months, with China suffering from deep deflation in its manufacturing sector, the real value of the renminbi has been dragged upwards by 15 per cent because it has been largely fixed against the appreciating US dollar.