Plaza Accord
In September 1985, the Group of Five, or G-5, countries—the United States, Japan, the United Kingdom, Germany, and France—meeting at the Plaza Hotel in New York announced the signing of the Plaza Accord. One main purpose of this agreement was to lower the value of the dollar vis-àvis the yen. At the time, Japan had a large trade surplus with the United States. It was thought that by weakening the dollar and strengthening the yen American exports would be cheaper and hence sell more in Japan and elsewhere. More important, as a result of the strengthening of the yen, Japanese exports would be more expensive and hence sell less in the United States.
The Plaza Accord was the result of several rounds of secret negotiations among the G-5 earlier in 1985. The group set aside around $18 billion to intervene in global markets to weaken the dollar and, it was thought, improve the export position of American corporations. In an almost unprecedented example of policy coordination, the yen rose in value from around 240 to the dollar to about 200 by the end of 1985. By 1987, it had doubled in value vis-à-vis the dollar. It seemed that the G-5's intervention in the market had worked. But the effect on the U.S. trade deficit was minimal. Thus, while the Plaza Accord marked an important milestone in G-5 cooperation, it did not improve the U.S. trade balance.
There are two primary reasons that strengthening the yen did not lead to a reduction in the U.S. trade deficit. First, Japanese corporations cut prices to compensate partially for the increase in the yen's value. This, along with an interest-rate cut by the Bank of Japan, provided breathing room for Japanese firms. Second, many Japanese corporations began to export production to other areas of Asia and to the United States itself. Japanese firms already had ties with firms in other Asian countries, but the price pressures of a strong yen following the Plaza Accord led to deepening regional integration. Products that were previously exported from Japan were now being exported to the United States from other countries and therefore were counted not as Japanese exports but as Malaysian, Thai, or another country's exports.
Further Reading
Encarnation, Dennis J. (1992) Rivals Beyond Trade: America Versus Japan in Global Competition. Ithaca, NY: Cornell University Press.
Lincoln, Edward J. (1993) Japan's New Global Role. Washington, DC: Brookings Institution.
Murphy, R. Taggart. (1997) The Weight of the Yen. New York: W. W. Norton.
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