Exchange-rate policy has always been an interesting topic in international economics as it is an important instrument of macroeconomic policy. On July the 21st, 2005, the Chinese government announced changes in its exchange rate regime. So far, many discussions of the issues have provided short-term insights associated with Chinese exchange rate reforms. Far fewer studies have attempted to assess the long-term real implications of the new exchange rate system for China’s domestic economic development. This dissertation attempts to fill this gap. This dissertation takes Japan as a historical precedent for China due to considerable parallels between the two cases of Japan and China. Two key research questions are to address what are the major impacts of RMB appreciating on China’s economy and what kinds of lessons can be learned from Japan’s case. In order to examine the two research questions, this dissertation involved itself in theoretical reviews, analysis and in the case study of Japan and purposed to use the historical precedent to shed the light on the effects of the exchange rate reform in China.