Plaza Accord
Summary of the Plaza Accord
On September 22, 1985, finance ministers and central bank governors from five major advanced economies (the United States, Japan, the United Kingdom, Germany, and France) convened at the Plaza Hotel in New York. They reached the "Plaza Accord," aimed at correcting the excessively high valuation of the U.S. dollar.
The agreement sought to adjust the overvalued exchange rate of the dollar to better reflect the economic conditions of the respective countries.
The official statement emphasized that "exchange rates should play a role in adjusting international imbalances" and stated that "an orderly appreciation of major currencies against the dollar would be preferable." This marked a coordinated intervention to initiate a new era of dollar depreciation.
Background Leading to the Plaza Accord
Reagan's Strong Dollar Policy
In the early 1980s, U.S. President Ronald Reagan promoted the slogan "A Strong America." During his administration, the U.S. faced a "twin deficit" problem—large current account and fiscal deficits. Combined with high interest rates, this led to the continuous appreciation of the U.S. dollar.
Although Japan and European nations called for adjustments to the overvalued dollar, Reagan's insistence on the "strong dollar policy" maintained the situation. The problem of an overvalued dollar became increasingly severe.
Pressure from Domestic Sectors
The strong dollar weakened U.S. export competitiveness, prompting domestic industries such as manufacturing and agriculture to demand corrections to the dollar's overvaluation. In 1985, with James Baker becoming the Treasury Secretary, the U.S. government shifted its policy, initiating measures to sell dollars in intervention efforts.
Key Factors Behind the Accord
The shift in U.S. policy, along with mounting international pressure to address the overvaluation, led to the eventual conclusion of the Plaza Accord.
Content of the Plaza Accord
Exchange Rate Adjustment
Exchange rates should help correct international imbalances. Stable exchange rates are critical to creating a fair and predictable market environment. Proper valuation of currencies can stabilize economies and support international cooperation.
Correcting the Overvaluation of the Dollar
An orderly appreciation of major currencies against the dollar was deemed preferable. The overvalued dollar had weakened the export competitiveness of other nations and exacerbated trade imbalances. Coordinated actions were necessary to rectify this, stabilizing the global trade environment and improving investment conditions.
Coordinated Intervention
The Group of Five agreed to implement coordinated interventions to lower the value of the dollar. This was intended to curb excessive speculation in foreign exchange markets, stabilize international financial markets, and lay a foundation for long-term economic growth.
Impact of the Plaza Accord
Global Economic Effects
Following the Plaza Accord, the Group of Five conducted joint interventions to depreciate the dollar, significantly influencing global economic policies.
Impact on Hong Kong
The dollar's depreciation benefited Hong Kong's export sector. However, Hong Kong's economy had entered a phase of reinvestment in mainland China. Manufacturers relocated production to the mainland to reduce costs, while Hong Kong strengthened its role as a financial and service hub.
Impact on Taiwan
Taiwan had to reevaluate its export-oriented economic strategy. While the weaker dollar boosted export growth, Taiwan diversified its markets to reduce dependency on the U.S. This shift led to increased investments in mainland China and ASEAN countries.
Impact on Mainland China
For China, the Plaza Accord provided a significant opportunity to attract foreign investment. The influx of foreign capital bolstered the development of special economic zones and supported the nation's economic reform and opening-up policies.
Impact on Singapore
Singapore consolidated its position as an international financial hub. While the dollar's depreciation initially caused market turbulence, Singapore's role as a trade and investment center enabled it to weather the challenges.
Impact on Japan
Japan was one of the most affected nations. The yen's rapid appreciation following the Plaza Accord led to significant consequences.
Currency Appreciation
The yen appreciated sharply against the dollar, dropping from approximately 240 yen to 120 yen within two years, nearly halving its value.
Export Sector Challenges
The strong yen reduced the price competitiveness of Japanese goods in global markets, significantly affecting exports, particularly in industries like automobiles and electronics.
Expansion of Domestic Demand
Policies aimed at stimulating domestic consumption followed the yen's appreciation. Cheaper imported goods benefited consumers and temporarily boosted domestic demand.
Asset Price Inflation
The yen's appreciation made overseas assets more affordable, spurring outward investment. Domestically, capital flowed into real estate and the stock market, fueling a bubble economy. The eventual bursting of this bubble led to decades of economic stagnation.
Shift in Economic Policy
In response to the yen's appreciation, the Japanese government adopted a loose monetary policy, which contributed to the bubble economy. Additionally, industrial upgrades and globalization efforts accelerated within Japan’s manufacturing sector.
The Louvre Accord
The Plaza Accord resulted in a larger-than-expected depreciation of the dollar. About 17 months later, in February 1987, the G7 nations met at the Louvre in Paris, reaching the "Louvre Accord" to correct the excessive depreciation of the dollar.
Despite the Louvre Accord, the dollar's depreciation trend continued, further weakening the price competitiveness of major exporting nations like Japan and Germany in international markets.
The Plaza Accord remains a major turning point in the international monetary system. Its influence on exchange rate policies and economic developments is profound, and it is regarded as a landmark event in economic history.
