Macroscope | Japan then, China now: the US is resorting to economic rival-bashing tactics again

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

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Tourists throng the Nakamise shopping street in downtown Tokyo on September 7. As the yen plunges to its lowest level in decades, the Japanese economy is only now close to shaking off the deflationary impact of the Plaza Accord on currencies signed in 1985. Photo: EPA-EFE

Published: 4:30pm, 18 Sep 2022

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.