- The Plaza Accord, signed in New York in 1985, did its job of hobbling Japanese competitiveness and forcing a ‘hollowing out’ of the country’s economy
- While the US has been unable to use a Plaza-like weapon against China, it now seeks to protect ‘economic security’ by intervening in supply chains
Anthony Rowley
On September 22, 1985, finance ministers of the then G5 nations – France, West Germany, Japan, Britain and the United States – signed the Plaza Accord in New York, devaluing the dollar dramatically against the yen and major European currencies. It was a rival-bashing tactic that has since become an American habit.
Thirty-seven years later, almost to the day, Japan is only now getting close to shaking off the massive deflationary impact of the Plaza Accord, and while China has managed to shield itself against such currency attacks, it has come under siege from different economic weapons.
All the noise we are hearing now about the yen plunging to its lowest level in decades, along with calls for currency market interventions, ignores the fact that pre-Plaza the yen/dollar exchange rate was around 260 and that within a couple of years or so the yen almost doubled in value.
Some might argue that the rate of 260 yen to the dollar was just as arbitrary as that of 360 set by occupying powers after World War II. But the fact is that Japanese price structures had adjusted to these levels by the time of the Plaza Accord, and the deflationary shock was thus profound.
No economy can withstand a trauma of Plaza magnitude without having the stuffing knocked out of it. Japan adjusted, but only at the expense of manufacturing sector employment and domestic economic growth. It now faces the need to adjust yet again to keep pace with fresh external shocks.
As a consequence of the 1985 accord, signed in New York’s Plaza Hotel, Japan suffered several “lost decades” of growth thereafter. In fact, what is mistakenly described as yen “weakness” now marks something closer to a return to an equilibrium exchange rate for the yen.
Bank of Japan governor Haruhiko Kuroda is well aware of this fact. He and former vice finance minister Eisuke Sakakibara helped steer Japan through rough waters after the Plaza Accord and the trauma of deflation. He is unlikely to be in a hurry to return to a strong yen now.
Why has the US not cried foul at Kuroda’s stealth tactic of letting the yen begin a steady decline – if not to anything like pre-Plaza levels then at least to well below the 100 to the dollar or even the levels it touched at times in post-Plaza decades?
The answer is partly that the Plaza Accord did its job of hobbling Japanese competitiveness and forcing a “hollowing out” of the Japanese economy after manufacturers reacted by shifting manufacturing production offshore. And it is partly the fact that the US has bigger fish to fry nowadays.
Washington has been unable to use a Plaza-like weapon against China, which has wisely preserved exchange controls, but US administrations have found other weapons of choice to use against those who, like China, dare to challenge American supremacy.
Under the guise of protecting “economic security” – which is in reality old-fashioned protectionism by another name – the US and some of its allies have begun talking about and acting upon the idea of bringing US production back onshore where it is supposedly safe from competitors.
This is disastrously backward-looking. It implies that for the sake of political expediency, many of the evolutions that Asian and other economies have been forced to go through in order to adapt to overseas-initiated currency and trade wars will need to be reworked.
Trade links and manufacturing supply chains that have evolved in line with the requirements of efficient international production and distribution have survived arbitrary currency interventions and tariff impositions. But they are unlikely to survive security-minded interventions.
Inflation will inevitably become a more entrenched and long-lasting phenomenon as a result because from now on supply chain interruptions will reflect changes in underlying trade and economic structures rather than temporary hiccups caused by the Covid-19 pandemic.
All this exposes the fallacy that currency manipulation, tariffs and other trade barriers, plus specious arguments now about the need to preserve national economic security, can substitute for international cooperation on how the global economy and production should be structured.
It also highlights the fact that, in an age of globalisation, the idea that one major currency (the dollar) whose value is controlled by a single power (the US) can successfully facilitate trade and investment among multiple players without regard to their individual economic circumstances is wrong.
It is tragic that there is a refusal in Washington and other Western capitals to accept the fact that the world economic order has changed even if the political order is reluctant to adapt. There are bigger battles, such as climate change, to be fought than currency, trade and economic security wars.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
