Plaza Accord

Definition

The Plaza Accord was a 1985 agreement between five major industrialized nations aimed at depreciating the US dollar in relation to the Japanese yen and German mark. This agreement was significant because it marked a coordinated effort to manipulate exchange rates to correct trade imbalances, showing the interconnectedness of global economies and the collaborative approach to monetary policy among major powers.

5 Must Know Facts For Your Next Test

1. The Plaza Accord was signed on September 22, 1985, by finance ministers and central bank governors from the United States, Japan, West Germany, France, and the United Kingdom.
2. One of the main goals of the Plaza Accord was to address the growing trade deficit of the United States, which was attributed to an overvalued dollar.
3. Following the Plaza Accord, the US dollar did depreciate significantly against both the yen and the mark, illustrating the short-term effectiveness of coordinated monetary intervention.
4. The agreement is often credited with stabilizing global financial markets during a period of economic uncertainty in the mid-1980s.
5. While successful in its immediate goals, the Plaza Accord also contributed to economic issues in Japan, leading to an asset price bubble that eventually burst in the early 1990s.

Review Questions

• How did the Plaza Accord reflect a shift in international monetary policy among major economies?
  • The Plaza Accord represented a notable shift towards cooperative international monetary policy among major economies as countries recognized the need for collaboration to address global economic imbalances. By coordinating efforts to depreciate the US dollar, these nations aimed to stabilize their own economies while promoting fairer trade conditions. This agreement demonstrated a collective commitment to managing exchange rates and fostering economic stability in a highly interconnected global marketplace.
• Evaluate the short-term impacts of the Plaza Accord on international trade and currency values.
  • In the short term, the Plaza Accord successfully led to a significant depreciation of the US dollar against both the Japanese yen and German mark. This depreciation helped improve US trade competitiveness by making American exports cheaper and imports more expensive, addressing some trade imbalance issues. However, this manipulation of currency values also created tension among nations regarding currency fairness and market distortions, highlighting the complexity of international economic relations.
• Analyze the long-term consequences of the Plaza Accord on Japan's economy and its relationship with global markets.
  • The long-term consequences of the Plaza Accord were profound for Japan, as it inadvertently contributed to an economic bubble fueled by excessive liquidity and speculative investments following the dollar's depreciation. The appreciation of the yen made Japanese goods more expensive internationally, affecting export-led growth strategies. Eventually, this led to a severe economic downturn known as the 'Lost Decade' in Japan during the 1990s, showcasing how coordinated monetary policies can have unintended consequences on national economies and their roles in global markets.

Related terms

Exchange Rate: The value of one currency for the purpose of conversion to another, crucial for international trade and investment.

Currency Manipulation: When a country artificially adjusts its currency's value to gain unfair competitive advantage in international trade.

Bretton Woods System:

A monetary order established after World War II that created fixed exchange rates linked to the US dollar, which was convertible to gold.