What Is the Plaza Accord?
The Plaza Accord is a 1985 agreement among the G-5 nations – France, Germany, the United States, the United Kingdom and Japan – to manipulate exchange rates by depreciating the U.S. dollar relative to the Japanese yen and the German Deutsche mark.
Also known as the Plaza Agreement, the intention of the Plaza Accord was to correct trade imbalances between the U.S. and Germany and the U.S. and Japan, but it only corrected the trade balance with the former.
The Plaza Accord Explained
The Plaza Accord lead to the yen and Deutsche dramatically increasing in value relative to the dollar. The dollar depreciated by as much as 50 percent relative to the yen and Deutsche mark. It was signed in New York City on Sept. 22, 1985, and named after the hotel where it was signed – the Plaza Hotel.
Purpose of the Plaza Accord
The Plaza Accord was meant to push down the U.S. dollar, with the U.S., Japan and Germany agreeing to implement certain measures to do so. For the U.S., it planned to reduce its federal deficit, Japan was to loosen monetary policy and Germany was to implement tax cuts.
Leading up to the Plaza Accord – from 1980 to 1985 – the U.S. dollar appreciated by over 50% against the yen, Deutsche Mark, French Franc and British pound. The strong dollar put pressure on the U.S. manufacturing industry, causing many major companies like Caterpillar and IBM to lobby congress to step in – hence, the Plaza Accord.
Following the Plaza Accord, the U.S., Japan and Germany all agreed to intervene whenever necessary to help push down the dollar. Many of the countries didn’t meet their goals, but the overall goal of reducing the dollar worked. The dollar declined by over 50 percent relative to the yen and Deutsche mark before the end of 1987.
Replacing the Plaza Accord
A second agreement, the Louvre Accord, was signed in 1987 to stop the continuing decline of the dollar. An unintended consequence of the Plaza Accord was that it caused Japan to increase trade and investment with East Asia, making it less dependent on the U.S.
The Louvre Accord was signed on Feb. 22, 1987, in Paris. The US and Japan kept their monetary pledges and the five nations agreed to step in if their currencies moved outside of a set range.
Japan and the Plaza Accord
The Plaza Accord solidified Japan’s presence as a major player in the international market. Yet a rising yen can lead to recessionary pressures for Japan’s economy. The strong yen led to greater expansionary monetary policy, which contributed to the asset bubble of the late 1980s. As a result, through the 1990s and 2000s Japan experienced a prolonged period of low growth and deflation.
Thus, the Plaza Accord helped propagate the “Lost Decade” in Japan. The accord failed to help reduce the U.S.-Japan trade deficit, although it did reduce the U.S. deficit with other countries. This comes as U.S. goods were now able to compete better in international markets, yet, Japanese import restrictions still made it hard for U.S. goods to succeed.