40 Years after Plaza Accord, Japan Still at Mercy of Forex Swings

Tokyo, Sept. 21 (Jiji Press)–Japan’s current inflation woes, triggered by rising import prices, stem partly from policies shaped by the country’s fear of a strong yen following the rapid appreciation of the currency on the foreign exchange market under the Plaza Accord 40 years ago. Under the Plaza Accord, struck on Sept. 22, 1985, Japan, the United States, Britain, France and then West Germany jointly intervened in currency markets to guide the dollar lower and prop up the economy of the United States, which was suffering from massive trade deficits at the time. Monday will mark the 40th anniversary of the accord clinched among the Group of Five countries’ finance ministers and central bank chiefs at the time, including then Japanese Minister of Finance Noboru Takeshita and then Bank of Japan Governor Satoshi Sumita. Currency authorities had expected the yen to strengthen against the dollar relatively moderately, with Toyoo Gyohten, former director-general of the Japanese Ministry of Finance’s International Finance Bureau, saying, “We had expected a 10 to 15 pct appreciation of the yen.” But the Japanese currency shot up, going from around 240 per dollar before the accord to past 130 by the end of 1987. As Japan had an export-oriented economy, many exporters in the nation were battered by the steep appreciation of the yen. The BOJ cut interest rates five times between 1986 and 1987 to deal with the economic fallout of the accord. But this excessive monetary easing fueled speculative trading in equities and real estate, leading to the nation’s notorious bubble economy. Later, the asset bubble collapsed, causing the Japanese economy to plunge into “the lost 30 years” of low growth and deflation. The global financial crisis triggered by the 2008 collapse of U.S. investment bank Lehman Brothers led to massive buying of the yen as a safe-haven currency, pushing it sharply higher. The currency reached 75.32 against the dollar, its strongest level since the end of World War II, in 2011, the year that a massive earthquake and tsunami struck northeastern Japan. In late 2012, the second cabinet of then Prime Minister Shinzo Abe was launched on a pledge to carry out the “Abenomics” reflationary economic policy mix, following public criticisms that insufficient monetary easing by the BOJ was behind the strong yen. Abe appointed Haruhiko Kuroda, former vice minister of finance for international affairs, a post known as the top currency diplomat, as new governor of the central bank. The BOJ under Kuroda began massive purchases of Japanese government bonds in April 2013 under an unprecedented monetary easing regime. This prompted the yen to fall and stock prices to rise. However, the unorthodox easing policy, which continued for 11 years, was unable to boost the Japanese economy, with the country’s potential growth rate long slumping below 1 pct. The cheap yen has boosted yen-denominated overseas profits of Japanese exporters. But Japanese “corporations have neglected to invest in technological development, hindering productivity growth” as a result, according to Yukio Noguchi, professor emeritus at Hitotsubashi University. The yen’s real effective exchange rate, which shows the currency’s comprehensive strength, came to 72.21 in July this year against the 2020 base of 100, around the same level in the early 1970s. The weak yen has amplified inflation stoked by the effects of the COVID-19 pandemic and Russia’s invasion of Ukraine, weighing heavily on household finances. In 2023, Japan’s nominal per-capita gross domestic product in dollar terms ranked 22nd out of the 38 member states of the Organization for Economic Cooperation and Development, coming behind South Korea at 21st place. The decline of Japan’s economic might is becoming increasingly clear, and Noguchi warned that the country is “on the verge of losing its status as a developed country.” END [Copyright The Jiji Press, Ltd.]