The 1985 Plaza Accord represents a major victory of international cooperation and monetary intervention, demonstrating the power of concerted political clout and multilateral agreement. For the United States, the benefits of the agreement were apparent and immediate – the U.S. dollar quickly devalued relative to other major currencies, even beyond the planned point, due to currency market speculation. This devaluation avoided the predicted “pop” of the U.S. dollar bubble, greatly reducing the potential for a crash. The outcome was a resurgence in the competitiveness of U.S. goods on world markets. For the other major players, however, the results were much more mixed. Theoretically, a lower real exchange rate of the U.S. dollar would make production costs cheaper for foreign firms using American goods, but this benefit is evidently more dispersed and nuanced than the plethora of upsides for the U.S. In particular, Japan came out looking like a loser from the Plaza Accord.
During the question and answer period of the Baker Institute’s “Currency Policy Then and Now: 30th Anniversary of the Plaza Accord,” Columbia University Professor Takatoshi Ito and University of California-Berkeley economist Barry Eichengreen indicated that the Plaza Accord was more favorable for Japan than the alternative of the U.S. Congress enacting protectionist legislation against foreign imports. This would have limit Japan manufacturers’ access to lucrative American markets. Protectionist policies would have also, however, greatly injured the U.S. The textbook macroeconomic model predicts that restricting imports would not affect the United States’ net exports balance, but only cause appreciation of the U.S. dollar. Protectionist policies, in fact, would lead to the exact opposite of the desired outcome from the U.S. point of view.
Interestingly, Ito notes in his working paper for the conference that, “witness accounts show that Japan was (a) more than willing participant of the Plaza Agreement.” At the time, Ito asserts, Japan was pleased to be at the discussion table after being excluded from the decision process that led to the “Nixon Shock” in 1971, which portended the breakdown of Bretton Woods. In 1985, Japan was willing to cooperate if it was guaranteed a voice in the discussion. Ultimately, Japan was caught in an uncomfortable position: cooperate and intentionally appreciate the yen in a time when Japan was heavily export driven, or fail to cooperate and lose access to a massive market. Neither option was particularly appealing, nor was the eventual outcome. The yen’s appreciation is cited as a factor that led to the recessionary effects and mild deflation in Japan in the early 1990s. At best, the Plaza Accord was a painful but necessary agreement for Japan.
The U.S. effectively coerced Japan into cooperating on the Plaza Accord with the threat of a worse alternative: protectionist legislation. The effect of such legislation on the world economy would likely have been disastrous and prompted other countries to scramble to protect domestic markets and prevent currency destabilization. Perhaps the Plaza Accord should be viewed in the more critical light of the alternative it avoided — for Japan and other economic players, the Plaza Accord was the most palatable and least harmful of few unsavory options.
Sam Akers is a Rice University sophomore majoring in economics and policy studies.