The Plaza Accord, a multilateral agreement concluded among the United States, Japan, West Germany, France and Britain in 1985 to depreciate the US dollar against the yen and the Deutsche mark, has often been seen as the watershed in Japan’s post-war economic miracle.
After the agreement had been sealed, Japan’s booming export-oriented economy began to decline, entering a decade-long recession in the 1990s.
As a matter of fact, the country has yet to fully recover from that recession even to this day.
Over the years, many academics have suspected that the Plaza Accord could have been a politically motivated conspiracy perpetrated by Washington to curb Japan’s growing economic power, and unsuspecting Tokyo eagerly walked into this carefully prepared trap.
As China has replaced Japan as the world’s second-largest economy, recently there has been talk that Washington might once again resort to its old tricks and force Beijing into allowing the renminbi to appreciate, so as to narrow the quickly widening trade deficit the US has with China and curb its Asian rival’s rapidly growing economic influence.
The question is, however, was the Plaza Accord really something imposed upon Japan against its will by the US, like many people think?
Historical facts suggest otherwise.
In fact, back in the mid-’80s, Tokyo was as eager for the Plaza Accord to be signed as was Washington, because at that time the US Congress, dismayed at the country’s widening trade deficit with Japan, was already working on a bill that, once passed, would impose punitive tariffs on Japanese exports to the US.
Fearful that it might lose the irreplacable American market, the Japanese government was therefore more than willing to allow the yen to appreciate in return for the withdrawal of that bill.
Also, Japan was hoping to adjust its economic structure, stimulate the domestic economy and reduce its overreliance on exports.
Whether the appreciation of the yen is a direct cause of Japan’s subsequent recession remains a subject of dispute.
That’s because, while the rising yen led to a real estate bubble in Japan, the rising Deutsche mark didn’t lead to an economic bubble or a recession in Germany.
The cases of Japan and China are not directly comparable, because while the appreciation of the yen did slow down Japan’s exports and cause economic losses, the appreciation of the yuan might not necessarily be a bad thing for China.
That’s because a stronger yuan can stimulate domestic demand in China and facilitate the internationalization of the currency.
It would thus be an oversimplification to draw a direct parallel between the cases of China and Japan.
This article appeared in the Hong Kong Economic Journal on May 17.
Translation by Alan Lee
[Chinese version 中文版]
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