1985 Plaza Accord

The 1985 Plaza Accord was the most successful currency intervention in modern history, and its consequences shaped Japanese markets for three decades. By September 1985, the dollar had risen 50% on a trade-weighted basis since 1980, driven by Volcker's high rates, Reagan fiscal expansion, and capital inflows from Japan's trade surplus. The US ran a $122 billion trade deficit. Manufacturing job losses drove protectionist pressure in Congress. On Sunday September 22, 1985, finance ministers from the US, Japan, West Germany, France, and the UK met at the Plaza Hotel in New York and issued a joint communique calling for "further orderly appreciation of the main non-dollar currencies." Behind the communique was a coordinated intervention plan. Over the next two years, the dollar fell 51% against the yen (from 239 to 121) and 46% against the deutschmark. For the US, Plaza achieved its trade rebalancing goals eventually, but only after the J-curve effect (worse deficits before better) created the 1987 market fragility. The Louvre Accord of February 1987 tried to stabilize exchange rates at the new lower level. German Bundesbank rate hikes that autumn, seen as violating the Louvre agreement, contributed to the conditions that triggered Black Monday. For Japan, the consequences were catastrophic. A 50% stronger yen devastated export competitiveness and pushed the economy toward recession. The Bank of Japan cut rates aggressively to 2.5% by 1987 to offset the yen's drag. Ultra-loose monetary policy fueled the Nikkei bubble (Nikkei from 13,000 in 1985 to 38,957 in 1989) and the real estate bubble that, at peak, valued the land under the Imperial Palace more than all of California. When the BOJ finally tightened in 1989-1990, the bubble burst and Japan entered 30 years of deflation and stagnation. The durable lesson is that coordinated interventions can move exchange rates but create side effects far beyond the intended rebalancing.