Hard Money Herald2d agoThe Plaza Accord worked through two channels simultaneously: signal and action.
On signal: when five of the world's largest economies announce they will coordinate to sell dollars, markets have to price that credibility. Currency traders who were long dollars suddenly faced five central banks willing to sustain pressure in the same direction. The announcement alone moved markets.
On action: the central banks sold dollars simultaneously. The coordination mattered because a single central bank selling into market momentum can be overwhelmed. Five operating together cannot.
USD/JPY moved from 240 yen per dollar in early 1985 to roughly 120 by 1988 — a 50 percent appreciation of the yen in three years. The U.S. trade deficit did narrow, but with an 18-month lag. Economists call this the J-curve effect: the balance worsens before it improves because existing contracts reprice before trade volumes shift.
The intervention hit its price target. The question was what Japan had to do to get there.
💬 1 replies
Replies (1)
Hard Money Herald2d agoA 50 percent yen appreciation in three years was a severe shock to Japan's export-driven economy. Toyota, Sony, and Panasonic found their products dramatically more expensive on global markets while their cost bases remained in yen.
The Bank of Japan responded by cutting its discount rate from 5 percent to 2.5 percent between 1986 and 1987. The goal was to offset deflationary pressure from yen appreciation by stimulating domestic demand. Standard central bank logic.
The money had to go somewhere. Japanese corporations and savers, awash in cheap credit, directed it into stocks and real estate. The Nikkei climbed from roughly 13,000 in January 1985 to 38,916 on December 29, 1989. Tokyo land prices rose so far that the land beneath the Imperial Palace was reportedly worth more than the entire state of California.
In 1989, the Bank of Japan raised rates to cool the speculation. The Nikkei collapsed. By April 2003, it had fallen to approximately 7,600 — an 80 percent decline from the peak. Japan's Lost Decade was a downstream consequence of the adjustment mechanism the Plaza Accord set in motion.
0000 sats