China, explained.
A trading session in October 1988 at the Tokyo Stock Exchange under a large sign showing the value of the yen to the dollar (Junji Kurokawa/AFP via Getty Images)
A few lessons from economic history for a start.
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A US dollar deal? Explaining a lack of enthusiasm for a Plaza Accord reduxA US dollar deal? Explaining a lack of enthusiasm for a Plaza Accord redux
Donald Trump dislikes the strong US dollar, blaming this for America’s lack of international competitiveness and large current account deficit. Trump believes foreigners have gained unfair competitive advantage by holding their currencies artificially low.
But his economic plans will put upward pressure on the dollar: tariffs; a larger budget deficit; and faster growth. Markets have anticipated this by pushing up the value of the US dollar since his election win.
Reflecting these concerns, Trump’s Treasury Secretary nominee Scott Bessent revived the idea of the 1985 Plaza Accord – an agreement between the then G5 countries of France, Germany, the United States, the United Kingdom and Japan for concerted market intervention to depreciate the dollar – against all major currencies, but principally against the Japanese yen.
By the time of the Plaza Accord, the dollar had surged by 50 per cent over the previous five years, a period coinciding with a growing US current account deficit. Japan’s dominance of global manufacturing trade was seen as the principal culprit.
Initially, the United States had responded by negotiating bilateral “voluntary” export controls with Japan. Japan was also pressured to increase its manufactured imports from the United States, such as motor vehicles, but without effect: Japanese consumers noted that American cars were enormous and had the steering wheel on the wrong side.
Hence the Plaza Accord in September 1985. It certainly coincided with a dollar turn-around. The yen appreciated from 240 to 120 to the dollar over the next two years, leaving a Japanese exporter earning half as many yen for every dollar of exports.
Knowing this history, China, America’s modern economic rival, long-ago rejected any thought of signing on to a repeat of the Plaza Accord.
But today few look back on the Plaza Accord with nostalgia. Bessent’s thought-bubble was met with a resounding lack of enthusiasm.
Whatever the drivers of the yen appreciation back then, the authorities on both sides accepted that the adjustment got out of hand: the original intention was for a dollar depreciation of 10-15 per cent, not a halving in value against the yen. There was a scramble to reset the messaging: the February 1987 Louvre Agreement attempted to stabilise bilateral rates among all the principal currencies.
By 1985, Japan had realised it could not maintain its export-led growth and, under threat from the United States, tried to foster structural change towards consumption-led growth. The attitude to Japan in Washington, and especially in Congress, was poisonous.
A group of Republican congress members smash a Japanese-made Toshiba radio on the lawns of the US Capitol in 1987 in protest of the company's dealing with the Soviet Union (Bettmann/Getty Images)
Japan halved its interest rate in an attempt to contain the runaway yen appreciation and boosted spending with financial deregulation and incentives for investment, especially property development. The economy, still booming from the momentum of the high-growth decades and now hyped by low interest rates and banks eager to lend, experienced an extraordinary boom in asset prices, both in real estate and equities. The grounds of the Imperial Palace in Tokyo were said to be worth more than the whole of California. The stock market rose three-fold, with Tokyo and Osaka taking first and third place among global markets. Property prices rose four-fold, with magnificent skyscrapers springing up like mushrooms in Tokyo. Eight of the ten largest global banks were Japanese.
Extraordinary optimism abounded about Japan, especially domestically. A commonly held view was that Japan was set to surpass the United States. Its GDP reached 70 per cent of America’s. The head of Sony co-authored a book entitled A Japan that can say No. Japanese companies purchased major Hollywood studios and the Empire State Building.
Then, in 1990, the bubble burst.
Share prices fell first, then property prices. Projects which reflected Japan’s new high-living status were in trouble. The “world’s largest indoor beach” became the “world’s largest indoor deserted beach”. Export manufacturers went out of business, facing an exchange rate which appreciated to 81 yen to the dollar. Over the next decade the banking system, financier of the property bubble, slid into undeclared insolvency, culminating in bank runs in 1997.
Japan’s “lost decades” followed. The stock market finally returned to its 1990 peak in 2023, while the property market has yet to do so.
Of course, not all these woes can be attributed to the Plaza Accord. Japan made plenty of its own home-grown mistakes and the “Volcker shock” is probably largely responsible for the dollar bubble in the early 1980s that precipitated the action.
But knowing this history, China, America’s modern economic rival, long-ago rejected any thought of signing on to a repeat of the Plaza Accord.
That said, the similarities are uncanny. Japan’s spectacular growth was characterised by a manufacturing export boom fed by an artificially competitive exchange rate. Its economy was commonly forecast to surpass the United States. The Americans were greatly upset, especially by Japan’s large current account surplus and manufacturing success. China, too, needs structural change towards consumption rather than exports.
Perhaps the main difference is that Japan went into the Plaza Accord voluntarily, eager to ward off the inevitable alternative of draconian export controls which it thought would be still more damaging. The Japanese accepted the need for structural change and many of their problems were a result of their vigorous efforts to bring about swift structural change. There is little chance that China will take a similar voluntary path.
The more concerning lesson is just how tough the Americans can be, in pursuit of their own interests. If a mainstream President Ronald Reagan could be this tough even with a close and vital ally, imagine what Donald Trump can do to China.
About the author
Stephen Grenville
Dr Grenville is a Nonresident Fellow at the Lowy Institute.
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