Plaza Accord

In the early 1980s the tight monetary policy of the Federal Reserve under Paul Volcker and the expansionary fiscal policy of Reagan's first term (1981–84) pushed up long-term interest rates in the United States and drew in foreign capital. From 1980 to 1985 the dollar rose by about 50 percent against the yen, the Deutsche Mark, the franc and the pound. The strong dollar suited the financial sector but hurt American manufacturing and farming, and the US current account deficit reached 3.5 percent of GDP. Grain exporters, the car industry, heavy manufacturers such as Caterpillar and high-tech firms such as IBM and Motorola campaigned for protection against foreign competition, and by 1985 Congress was considering protectionist laws. To head off trade restrictions the White House opened negotiations.

At first the Reagan administration saw the strong dollar as a vote of confidence in the US economy and resisted intervention. The course changed when James Baker became Treasury Secretary in January 1985. After preparatory meetings of G5 deputies in July and August, the five finance ministers and central bank governors met at the Plaza Hotel on 22 September. Present were Baker for the United States, Chancellor of the Exchequer Nigel Lawson for Britain, Finance Minister Gerhard Stoltenberg for West Germany, Economy and Finance Minister Pierre Bérégovoy for France and Finance Minister Noboru Takeshita for Japan. The content had been settled beforehand by officials, and the meeting itself is said to have been a formality of about twenty minutes.

The announcement diagnosed large and potentially destabilising external imbalances: a large and growing US current account deficit, and large and growing surpluses in Japan and, to a lesser extent, Germany. Exchange rates, it said, should better reflect fundamental economic conditions, and "some further orderly appreciation of the main non-dollar currencies against the dollar is desirable"; the ministers stood ready to cooperate more closely to encourage this when to do so would be helpful. Each country added pledges. The United States promised to cut its fiscal deficit; Japan promised market opening, deregulation, "flexible management of monetary policy with due attention to the yen rate", financial liberalisation and domestic demand growth through private consumption and investment, by enlarging consumer and mortgage credit markets.

Markets reacted fast. On 23 September, the day after the announcement, the yen went from 235 to the dollar to about 20 yen stronger in a single day, and once moving the market accelerated: a year later the dollar traded in the 150s. When Takeshita said after the accord that "even 190 yen to the dollar would be fine", the yen rose faster still. A coordinated intervention announces its direction in advance and so draws speculators in, which gives it great force. The Bank of Japan, however, did not cut rates at once; it first let short-term rates stay high, and only began lowering the discount rate in 1986.

The strong yen shook an economy that relied on exports. Growth fell from 5.2 percent in 1985 to 3.3 percent in 1986, and the "endaka recession" followed. The government turned to expanding domestic demand, and in 1986–87 the Bank of Japan cut the discount rate step by step to 2.5 percent. Surplus money flowed into land and shares and fed the bubble. With the strong yen Japanese firms bought up American assets in what was called a "half-price sale" and moved factories to low-wage South-East Asia, helping that region's rapid growth.

The trade deficit with Japan itself barely shrank. The weaker dollar reduced the US deficit with Western Europe, but because of Japan's structural restrictions on imports the deficit with Japan stayed largely in place. Congress nonetheless held back the protectionist bills after the accord. By 1987 the dollar had fallen more than 25 percent against other currencies, and the United States, which needed foreigners to buy its Treasury bonds, began to fear that capital inflows would dry up. On 22 February 1987 six countries meeting at the Louvre in Paris agreed in the Louvre Accord "to foster stability of exchange rates around current levels", seeking to stop the dollar's fall.

Whether the Plaza Accord caused Japan's bubble and the long slump after it is disputed. In Japan some see the accord as the starting point of the stagnation that ran from the "lost decade" into the "lost thirty years", and the decision of Prime Minister Nakasone, Finance Minister Takeshita and BOJ Governor Sumita is generally read as a concession that accepted American demands in full. The economist Jeffrey Frankel disputes the timing: the yen rose in 1985–86 and the recession came in the 1990s, while in the bubble years of 1987–89 between them the exchange rate no longer pushed the yen up. The Deutsche Mark also rose sharply, yet West Germany had neither a bubble nor a recession. Richard Werner argues that outside pressure such as the accord, or the Finance Ministry's wish for lower rates, cannot by themselves explain the Bank of Japan conduct that produced the bubble.

Marxists read the accord as an episode in the world contest over manufacturing. According to Walden Bello, presenting Robert Brenner's account, the Reagan administration restored the edge of American manufacturing by breaking organised labour to hold down wages, keeping interest rates high to attract capital, and using the Plaza Accord to push the yen sharply up; Bello called the accord essentially a rescue operation of US industry by Japan and Germany. Yet the long recessions in Japan and Germany weakened their capacity to absorb US exports, and in the mid-1990s the Clinton administration engineered a "reverse Plaza Accord", letting the dollar rise to help Japanese manufacturing. In Bello's account this reversal undermined the competitiveness of the East and South-East Asian economies whose currencies were tied to the dollar, setting the stage for the Asian financial crisis of 1997–98. A 1999 review of Brenner in International Socialism likewise summed up that after the accord Japan deliberately adopted a loose monetary policy to reduce its trade surplus with the United States, and so produced the bubble economy.

The accord is still cited as a lesson. When the US–China trade war began in 2018 it drew new attention in China. Japanese figures including former Prime Minister Yasuo Fukuda advised China not to give in to American pressure for a stronger renminbi, which was widely noticed, and the state news agency Xinhua declared that "Japan's economic stagnation after it bowed to the United States in the Plaza Accord must not be forgotten".