The Plaza Accord was signed on September 21, 1985, by the G5 nations of the US, UK, West Germany, France, and Japan. This agreement was made in an effort to correct trade imbalances by altering exchange rates and devaluing the US dollar. The Japanese yen’s value increased significantly in relation to the US dollar as a direct result, which led to a number of changes and economic challenges for Japan.
As a result of the increased value and competitiveness of Japanese exports on the global market, the strengthening of the yen at first appeared to be supporting the Japanese economy. However, the long-term effects were less favorable. To counteract the damaging effects of the yen appreciation on domestic industries, the Bank of Japan significantly lowered interest rates. As a result of this choice, there was an unintended rise in investments and speculative activity in the stock and real estate markets, which led to a massive asset price bubble that lasted throughout the late 1980s.
This economic euphoria was short-lived because the bubble burst in the early 1990s, sending asset prices spiraling. After that, Japan’s economy experienced a protracted period of economic stagnation known as the “Lost Decade,” during which it battled deflation, slow growth, and rising public debt.”
The Japanese government and central bank made numerous attempts to bolster the economy by altering fiscal and monetary policy, but recovery was a difficult and slow process. The lingering effects of the Plaza Accord and the ensuing asset bubble continued to cast a shadow over Japan’s economic prospects.
Despite these challenges, Japan’s economy displayed remarkable resiliency. Over time, the nation’s focus has gradually shifted away from export-driven growth and toward domestic consumption and service industries. Spending increases were seen simultaneously in infrastructure, renewable energy, and R&D. These deliberate actions helped to diversify and strengthen the Japanese economy, laying the foundation for a more stable and secure future.
The Plaza Accord and its effects serve as a sobering reminder of how international economic agreements and well-intended policy interventions can have unintended and significant consequences. The development of the Japanese economy—from strength to turmoil and back to recovery—provides illuminating details about the intricate interplay of forces influencing the global economy and the necessity of adapting to changing circumstances.
Author: Pooyan Ghamari, Swiss Economist