Plaza Accord

Plaza Accord
	The 1985 "Plaza Accord" is named after New York City's Plaza Hotel, which was the location of a meeting of finance ministers who reached an agreement about managing the fluctuating value of the US dollar. From left are Gerhard Stoltenberg of West Germany, Pierre Bérégovoy of France, James A. Baker III of the United States, Nigel Lawson of Britain, and Noboru Takeshita of Japan.
Signed	September 22, 1985
Signatories	Pierre Bérégovoy ; Gerhard Stoltenberg ; Noboru Takeshita ; Nigel Lawson ; James Baker ;
Parties	France ; West Germany ; Japan ; United Kingdom ; United States ;
Language	English

Last updated December 12, 2024

The Plaza Accord was a joint agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French franc, the German Deutsche Mark, the Japanese yen and the British pound sterling by intervening in currency markets. The U.S. dollar depreciated significantly from the time of the agreement until it was replaced by the Louvre Accord in 1987.^[1]^[2]^[3] Some commentators believe the Plaza Accord contributed to the Japanese asset price bubble of the late 1980s.^[4]^[5]^[6]

Background

The tight monetary policy of Federal Reserve's Chairman Paul Volcker and the expansionary fiscal policy of President Ronald Reagan's first term in 1981–84 pushed up long-term interest rates and attracted capital inflow, appreciating the dollar.^[7] The French government was strongly in favor of currency intervention to reduce it, but US administration officials, such as Treasury Secretary Donald Regan and Under Secretary for Monetary Affairs, Beryl Sprinkel, opposed such plans, considering the strong dollar a vote of confidence in the US economy and supporting the concept of free market above all else.^[7] At the 1982 G7 Versailles Summit, the US agreed to a request by the other members to a study of the effectiveness of foreign currency intervention, which resulted in the Jurgensen Report at the 1983 G7 Williamsburg Summit, but it was not as supportive of intervention as the other leaders had hoped. As the dollar's appreciation kept rising and the trade deficit grew even more, the second Reagan administration viewed currency intervention in a different light. In January 1985, James Baker became the new Treasury Secretary and Baker's aide Richard Darman became Deputy Secretary of the Treasury. David Mulford joined as the new Assistant Secretary for International Affairs.^[7]

From 1980 to 1985, the dollar had appreciated by about 50% against the Japanese yen, Deutsche Mark, French franc, and British pound, the currencies of the next four biggest economies at the time.^[8] In March 1985, just before the G7, the dollar reached its highest valuation ever against the British pound, a valuation which would remain untopped for over 30 years.^[9] This caused considerable difficulties for the American industry, but at first, their lobbying was largely ignored by the government. The financial sector was able to profit from the rising dollar, and a depreciation would have run counter to the Reagan administration's plans for bringing down inflation. A broad alliance of manufacturers, service providers, and farmers responded by running an increasingly high-profile campaign asking for protection against foreign competition. Major players included grain exporters, the U.S. automotive industry, heavy American manufacturers like Caterpillar Inc., as well as high-tech companies including IBM and Motorola. By 1985, their campaign had acquired sufficient traction for Congress to begin considering passing protectionist laws. The negative prospect of trade restrictions spurred the White House to begin the negotiations that led to the Plaza Accord.^[10]^[11]

The devaluation was justified to reduce the U.S. current account deficit, which had reached 3.5% of the GDP, and to help the U.S. economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had halted the stagflation crisis of the 1970s by raising interest rates. The increased interest rate sufficiently controlled domestic monetary policy and staved off inflation. By the mid-1970s, Nixon successfully convinced several OPEC countries to trade oil only in USD, and the US would, in return, give them regional military support. This sudden infusion of international demand for dollars gave the USD the infusion it needed in the 1970s.^[12] However, a strong dollar is a double edged sword, inducing the Triffin dilemma which, on the one hand, gave more spending power to domestic consumers, companies, and to the US government, and on the other hand, hampered US exports until the value of the dollar re-equilibrated. The U.S. automobile industry was unable to recover.

Meeting at the Plaza Hotel

At the 17 January 1985 G5 meeting attended by James Baker, a small amount of currency intervention to depreciate the dollar was agreed upon and subsequently took place. US intervention was small in those months, but the German authorities intervened heavily to sell dollars in foreign exchange markets in February and March. In April at an OECD meeting, the US announced their potential interest in a meeting between the major industrial countries on the subject of international monetary reform, and preparations for the Plaza meeting began, with preparatory meetings by G5 deputies in July and August. On 22 September 1985, the finance ministers and central bank governors of the United States, France, Germany, Japan and Great Britain met at the Plaza Hotel in New York City and came to an agreement on the announcement that "some further orderly appreciation of the non-dollar currencies is desirable" and they "stand ready to cooperate more closely to encourage this when to do so would be helpful". The following Monday, when the meeting was made public, the dollar fell 4 percent in comparison to the other currencies.^[7]

Effects

Trade deficit

While for the first two years, the US deficit only worsened, it then began to turn around as the elasticities had risen enough that the quantity effects began to outweigh the valuation effect.^[7] The devaluation made U.S. exports cheaper to purchase for its trading partners, which in turn allegedly meant that other countries would buy more American-made goods and services. The Plaza Accord failed to help reduce the U.S.–Japan trade deficit, but it did reduce the U.S. deficit with other countries by making U.S. exports more competitive.^[4]^{[ better source needed ]} And thus, the US Congress refrained from enacting protectionist trade barriers.^[7]

Objective failure

Joseph E. Gagnon describes the Plaza's result being more due to the message that was sent to the financial markets about policy intentions and the implied threat of further dollar sales than actual policies. Intervention was far more pronounced in the opposite direction following the 1987 Louvre Accord, when the dollar's depreciation was decided to be halted.^[13]

The Plaza Accord was successful in reducing the U.S. trade deficit with Western European nations, but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan. This deficit was due to structural conditions that were insensitive to monetary policy, specifically trade conditions. The manufactured goods of the United States became more competitive in the exports market, though were still largely unable to succeed in the Japanese domestic market due to Japan's structural restrictions on imports. The Louvre Accord was signed in 1987 to halt the continuing decline of the U.S. dollar.

Following the subsequent 1987 Louvre Accord, there were few other interventions in the dollar's exchange rate such as by the first Clinton Administration in 1992–95. However, since then, currency interventions have been few among the G7. The European Central Bank supported in 2000 then over-depreciated euro. The Bank of Japan intervened for the last time in 2011, with the cooperation of the US and others to dampen strong appreciation of the yen after the 2011 Tōhoku earthquake and tsunami. In 2013, the G7 members agreed to refrain from foreign exchange intervention. Since then, the US administration has demanded stronger international policies against currency manipulation (to be differentiated from monetary stimulus).^[7]

The signing of the Plaza Accord was significant in that it reflected Japan's emergence as a real player in managing the international monetary system.^{[ citation needed ]} However, the rising yen may also have contributed to recessionary pressures for Japan's economy, to which the Japanese government reacted with massive expansionary monetary and fiscal policies. That stimulus in combination with other policies led to the Japanese asset price bubble of the late 1980s.^[4] Because of this, some commentators blame the Plaza Accord for the bubble, which, when burst, led into a protracted period of deflation and low growth in Japan known as the Lost Decade, which has effects still heavily felt in modern Japan.^[14] Jeffrey Frankel disagrees on the timing, pointing out that between the 1985–86 years of appreciation of the yen and the 1990s recession, came the bubble years of 1987–89 when the exchange rate no longer pushed the yen up.^[7] The rising Deutsche Mark also did not lead to an economic bubble or a recession in Germany.^[6]^[5] Economist Richard Werner says that external pressures such as the accord and the policy of Ministry of Finance to reduce the official discount rate are insufficient in explaining the actions taken by the Bank of Japan that led to the bubble.^[15]

Related Research Articles

The yen is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro.

In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of the euro.

The Bank of Japan is the central bank of Japan. The bank is often called Nichigin (日銀) for short. It is headquartered in Nihonbashi, Chūō, Tokyo.

The global financial system is the worldwide framework of legal agreements, institutions, and both formal and informal economic action that together facilitate international flows of financial capital for purposes of investment and trade financing. Since emerging in the late 19th century during the first modern wave of economic globalization, its evolution is marked by the establishment of central banks, multilateral treaties, and intergovernmental organizations aimed at improving the transparency, regulation, and effectiveness of international markets. In the late 1800s, world migration and communication technology facilitated unprecedented growth in international trade and investment. At the onset of World War I, trade contracted as foreign exchange markets became paralyzed by money market illiquidity. Countries sought to defend against external shocks with protectionist policies and trade virtually halted by 1933, worsening the effects of the global Great Depression until a series of reciprocal trade agreements slowly reduced tariffs worldwide. Efforts to revamp the international monetary system after World War II improved exchange rate stability, fostering record growth in global finance.

In macroeconomics, hard currency, safe-haven currency, or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's hard status might include the stability and reliability of the respective state's legal and bureaucratic institutions, level of corruption, long-term stability of its purchasing power, the associated country's political and fiscal condition and outlook, and the policy posture of the issuing central bank.

The Bretton Woods system of monetary management established the rules for commercial relations among the United States, Canada, Western European countries, and Australia and other countries, a total of 44 countries after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold. It also envisioned greater cooperation among countries in order to prevent future competitive devaluations, and thus established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to nations with balance of payments deficits.

In macroeconomics and modern monetary policy, a devaluation is an official lowering of the value of a country's currency within a fixed exchange-rate system, in which a monetary authority formally sets a lower exchange rate of the national currency in relation to a foreign reference currency or currency basket. The opposite of devaluation, a change in the exchange rate making the domestic currency more expensive, is called a revaluation. A monetary authority maintains a fixed value of its currency by being ready to buy or sell foreign currency with the domestic currency at a stated rate; a devaluation is an indication that the monetary authority will buy and sell foreign currency at a lower rate.

Foreign exchange reserves are cash and other reserve assets such as gold and silver held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets. Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.

The Louvre Accord was an agreement, signed on February 22, 1987, in Paris, that aimed to stabilize international currency markets and halt the continued decline of the US dollar after 1985 following the Plaza Accord. It was considered, from a relational international contract viewpoint, as a rational compromise solution between two ideal-type extremes of international monetary regimes: the perfectly flexible and the perfectly fixed exchange rates.

An exchange rate regime is a way a monetary authority of a country or currency union manages the currency about other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors, such as economic scale and openness, inflation rate, the elasticity of the labor market, financial market development, and capital mobility.

Strong dollar policy is United States economic policy based on the assumption that a "strong" exchange rate of the United States dollar is in the interests of the United States. In 1971, Treasury Secretary John Connally famously remarked how the US dollar was "our currency, but your problem," referring to how the US dollar was managed primarily for the US' interests despite it being the currency primarily used in global trade and global finance. A strong dollar is recognized to have many benefits but also potential downsides. Domestically in the US, the policy keeps inflation low, encourages foreign investment, and maintains the currency's role in the global financial system. Globally, a strong dollar is thought to be harmful for the rest of the world. In financial markets, the strength of the dollar is measured in the "DXY Index", an index which measures the exchange rate of the dollar relative to other major currencies.

In macroeconomics and economic policy, a floating exchange rate is a type of exchange rate regime in which a currency's value is allowed to fluctuate in response to foreign exchange market events. A currency that uses a floating exchange rate is known as a floating currency, in contrast to a fixed currency, the value of which is instead specified in terms of material goods, another currency, or a set of currencies.

The Japanese asset price bubble was an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated. In early 1992, this price bubble burst and Japan's economy stagnated. The bubble was characterized by rapid acceleration of asset prices and overheated economic activity, as well as an uncontrolled money supply and credit expansion. More specifically, over-confidence and speculation regarding asset and stock prices were closely associated with excessive monetary easing policy at the time. Through the creation of economic policies that cultivated the marketability of assets, eased the access to credit, and encouraged speculation, the Japanese government started a prolonged and exacerbated Japanese asset price bubble.

Currency depreciation is the loss of value of a country's currency with respect to one or more foreign reference currencies, typically in a floating exchange rate system in which no official currency value is maintained. Currency appreciation in the same context is an increase in the value of the currency. Short-term changes in the value of a currency are reflected in changes in the exchange rate.

Endaka or Endaka Fukyo is a state in which the value of the Japanese yen is high compared to other currencies. Since the economy of Japan is highly dependent on exports, this can cause Japan to fall into an economic recession.

Currency intervention, also known as foreign exchange market intervention or currency manipulation, is a monetary policy operation. It occurs when a government or central bank buys or sells foreign currency in exchange for its own domestic currency, generally with the intention of influencing the exchange rate and trade policy.

In macroeconomics, sterilization is action taken by a country's central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit. This can involve open market operations undertaken by the central bank whose aim is to neutralize the impact of associated foreign exchange operations. The opposite is unsterilized intervention, where monetary authorities have not insulated their country's domestic money supply and internal balance against foreign exchange intervention.

Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies. As the exchange rate of a country's currency falls, exports become more competitive in other countries, and imports into the country become more and more expensive. Both effects benefit the domestic industry, and thus employment, which receives a boost in demand from both domestic and foreign markets. However, the price increases for import goods are unpopular as they harm citizens' purchasing power; and when all countries adopt a similar strategy, it can lead to a general decline in international trade, harming all countries.

The Currency War of 2009–2011 was an episode of competitive devaluation which became prominent in the financial press in September 2010. It involved states competing with each other in order to achieve a relatively low valuation for their own currency, so as to assist their domestic industry. Due to the Great Recession, the export sectors of many emerging economies experienced declining orders and from 2009, several states began or increased their levels of currency intervention. According to many analysts the currency war had largely fizzled out by mid-2011 although the war rhetoric persisted into the following year. In 2013, there were concerns of an outbreak of another currency war, this time between Japan and the Euro-zone.

Fear of floating is the hesitancy of a country to follow a floating exchange rate regime, rather than a fixed exchange rate. This is more relevant in emerging economies, especially when they suffered from financial crisis in the last two decades. In foreign exchange markets of the emerging market economies, there is evidence showing that countries who claim they are floating their currency, are actually reluctant to let the nominal exchange rate fluctuate in response to macroeconomic shocks. In the literature, this is first convincingly documented by Calvo and Reinhart with "fear of floating" as the title of one of their papers in 2000. Since then, this widespread phenomenon of reluctance to adjust exchange rates in emerging markets is usually called "fear of floating". Most of the studies on "fear of floating" are closely related to literature on costs and benefits of different exchange rate regimes.

References

↑ "Economy: Announcement of [G5] Finance Ministers & Central Bank Governors (the Plaza Agreement)". margaretthatcher.org. Margaret Thatcher Foundation. Archived from the original on December 3, 2018. Retrieved December 3, 2018.
↑ "Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)". g8.utoronto.ca. University of Toronto. Archived from the original on December 3, 2018. Retrieved December 3, 2018.
↑ Funabashi, Yōichi (1989). Managing the Dollar: From the Plaza to the Louvre (2nd ed.). Institute for International Economics. pp. 261–271. ISBN 978-0-88132-097-8.
1 2 3 Hargrave, Marshall (August 22, 2019). "Plaza Accord". Investopedia . Retrieved April 8, 2021.
1 2 Funabashi, Yoichi (September 11, 2018). "A U.S.-China 'Plaza Accord'?". The Japan Times. Retrieved May 29, 2021.
1 2 Shen, Simon. "Did the Plaza Accord 'conspiracy' doom Japan, and is China next?". EJ Insight. Hong Kong Economic Journal. Retrieved May 29, 2021.
1 2 3 4 5 6 7 8 Frankel, Jeffrey. "The Plaza Accord, 30 Years Later" (PDF). National Bureau of Economic Research (No. w21813). Retrieved May 29, 2021.
↑ Brook, Anne-Marie; Sédillot, Franck; Ollivaud, Patrice (May 18, 2004). "Channels for Narrowing the US Current Account Deficit and Implications for Other Economies". OECD Economics Department Working Papers (390). Paris: OECD Publishing: 8, figure 3. doi: 10.1787/263550547141 .
↑ Wilkes, Tommy; Chatterjee, Saikat (September 3, 2019). "Plotting sterling's latest lurch - just how low did it go?". Reuters . Archived from the original on September 3, 2019. Retrieved April 8, 2021. The all-time low was $1.0545 touched in March 1985, just before G7 powers acted to rein in the superdollar of the Reagan era in the so-called "Plaza Accord".
↑ Hiscox, Michael J. (2005). "The Domestic Sources of Foreign Economic Policies". In Ravenhill, John (ed.). Global Political Economy (1st ed.). Oxford; New York: Oxford University Press. p. 65. ISBN 0-19-926584-4. OCLC 60383498.
↑ Destler, I. M.; Henning, C. Randall (1993). Dollar Politics: Exchange Rate Policymaking in the United States. Institute for International Economics. pp. 105–130. ISBN 978-0-88132-079-4.
↑ Tun, Zaw Thiha (April 21, 2020). "How Petrodollars Affect the U.S. Dollar". Investopedia. Retrieved April 8, 2021.
↑ Gagnon, Joseph E. (2016). "Foreign Exchange Intervention since the Plaza Accord". In Bergsten, C. Fred; Green, Russell A. (eds.). International Monetary Cooperation: Lessons from the Plaza Accord after Thirty Years.
↑ "China seeks to learn from mistakes of 1985 Plaza Accord". The Japan Times . September 9, 2006. Retrieved September 27, 2011.
↑ Werner, Richard A. (2002). "Monetary Policy Implementation in Japan: What They Say versus What They Do". Asian Economic Journal. 16 (2): 111–151. doi:10.1111/1467-8381.00145.

External links

Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)
U.S. Treasury - Exchange Stabilization Fund, Intervention Operations 1985-90 at the Wayback Machine (archived 2010-11-12)
Plaza Agreement, ANZ Financial Dictionary from Language of Money by Edna Carew at the Wayback Machine (archived 2009-02-23)
Reverse Plaza Accord

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.

[1] "Economy: Announcement of [G5] Finance Ministers & Central Bank Governors (the Plaza Agreement)". margaretthatcher.org. Margaret Thatcher Foundation. Archived from the original on December 3, 2018. Retrieved December 3, 2018.

[2] "Announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan, the United Kingdom, and the United States (Plaza Accord)". g8.utoronto.ca. University of Toronto. Archived from the original on December 3, 2018. Retrieved December 3, 2018.

[3] Funabashi, Yōichi (1989). Managing the Dollar: From the Plaza to the Louvre (2nd ed.). Institute for International Economics. pp. 261–271. ISBN 978-0-88132-097-8.

[invest01-4] 1 2 3 Hargrave, Marshall (August 22, 2019). "Plaza Accord". Investopedia . Retrieved April 8, 2021.

[funabashi-5] 1 2 Funabashi, Yoichi (September 11, 2018). "A U.S.-China 'Plaza Accord'?". The Japan Times. Retrieved May 29, 2021.

[shen-6] 1 2 Shen, Simon. "Did the Plaza Accord 'conspiracy' doom Japan, and is China next?". EJ Insight. Hong Kong Economic Journal. Retrieved May 29, 2021.

[frankel-7] 1 2 3 4 5 6 7 8 Frankel, Jeffrey. "The Plaza Accord, 30 Years Later" (PDF). National Bureau of Economic Research (No. w21813). Retrieved May 29, 2021.

[8] Brook, Anne-Marie; Sédillot, Franck; Ollivaud, Patrice (May 18, 2004). "Channels for Narrowing the US Current Account Deficit and Implications for Other Economies". OECD Economics Department Working Papers (390). Paris: OECD Publishing: 8, figure 3. doi: 10.1787/263550547141 .

[9] Wilkes, Tommy; Chatterjee, Saikat (September 3, 2019). "Plotting sterling's latest lurch - just how low did it go?". Reuters . Archived from the original on September 3, 2019. Retrieved April 8, 2021. The all-time low was $1.0545 touched in March 1985, just before G7 powers acted to rein in the superdollar of the Reagan era in the so-called "Plaza Accord".

[10] Hiscox, Michael J. (2005). "The Domestic Sources of Foreign Economic Policies". In Ravenhill, John (ed.). Global Political Economy (1st ed.). Oxford; New York: Oxford University Press. p. 65. ISBN 0-19-926584-4. OCLC 60383498.

[11] Destler, I. M.; Henning, C. Randall (1993). Dollar Politics: Exchange Rate Policymaking in the United States. Institute for International Economics. pp. 105–130. ISBN 978-0-88132-079-4.

[12] Tun, Zaw Thiha (April 21, 2020). "How Petrodollars Affect the U.S. Dollar". Investopedia. Retrieved April 8, 2021.

[gagnon-13] Gagnon, Joseph E. (2016). "Foreign Exchange Intervention since the Plaza Accord". In Bergsten, C. Fred; Green, Russell A. (eds.). International Monetary Cooperation: Lessons from the Plaza Accord after Thirty Years.

[japantimes-14] "China seeks to learn from mistakes of 1985 Plaza Accord". The Japan Times . September 9, 2006. Retrieved September 27, 2011.

[15] Werner, Richard A. (2002). "Monetary Policy Implementation in Japan: What They Say versus What They Do". Asian Economic Journal. 16 (2): 111–151. doi:10.1111/1467-8381.00145.

[1]

[2]

[3]

[4]

[5]

[6]

[7]

[8]

[9]

[10]

[11]

[12]

[13]

[14]

[15]