Cooperation for international economic stability. So I wrote about this here, but Plaza was just one component so I’ll elaborate a bit.

The communiqué, dated 22 September, in part read: “[The ministers and governors] believe that . . . some further orderly appreciation of the main non-dollar currencies against the dollar is desirable. They stand ready to cooperate more closely to encourage this when to do so would be helpful.” (Takagi, 2015)

So the Plaza Accord was an agreement with the objective of devaluing the dollar or at least mitigating the overvaluation of it. This was going to be market intervention in cooperation with those countries. The other side was that other currencies mainly the Japanese yen and the German mark were to strength. Then this would reduce the trade imbalances specifically the trade deficit in the US. Lastly and most importantly, the Reagan Administration was to sell this as an alternative to the protectionist legislation developing in Congress. There was a lot of visible deindustrialization in the US in the ‘rust belt’. Globalization was taking victims and among them was the American blue collar worker. So steel, coal, and manufacturing were perishing from the US economy. Trade advantages of the Japanese was a very sensitive topic, but it was the age of trade liberalization of Reagan and Thatcher. So Reagan was feeling the pressure to intervene, but ideologically as a conservative was against interfering. The US had a policy of ‘benign neglect’ on trade and currency.

Why was the dollar so overvalued? Or, why were other currencies so weak? This doesn’t have exact explanations and remains somewhat unresolved. The US was doing better by 1985, but from 1973 through the early 1980s there was stagflation. See here authored by u/shane_music for a great explanation of the stagflation in the 1970s in the US and its complexities. So the US was not exactly strong, but was a recovering economy. As late as 1982 there was a recession in the US. So it was baffling why the dollar was so strong even when the US economy was not doing well throughout the 1970s through early 1980s. The other economies were doing very well so it defied economic logic why their currencies were so weak. Americans were massively buying stuff from Japan and Germany and that would make their currencies more valuable, but it was just not happening. Those currencies were just not reflecting their ‘real’ values. It should also be noted that Japan had intervened in devaluing the yen in the late 1970s, but not much during the early 1980s.

There are explanations that the dollar was overvalued because during the fight against stagflation US assets especially Treasury instruments (bonds, t-bills) were attractive with higher interest rates and better returns. So foreigners were selling their currencies to buy US treasuries and other US assets. Interest rates were in the 7 - 8 percent range in the US and so they were rather high. The Reagan tax cuts were not paid for in the budget. Thus the Treasury increased bond issuance because of the budget shortfalls and thus more supply of bonds. There were other leaders critical of US spending and the budget deficits, but correcting US spending is politically difficult considering Democrats had control of Congress and the US also spent a lot on defense. Yet the additional debt should have weakened the dollar’s value, not improved it. So the more dollars created by funding the debt, the less valuable the dollar should be.

Japan was the first on board to participate likely because ire against Japan was very visible in the US. They were actually very enthusiastic and this remains somewhat unclear why they were so enthusiastic. Japan had been engaging in rather unfair trading practices such as subsidizing exports through taxes and using non-tariff barriers to increase import costs such as issuing high product quality standards. In addition, Japan was hard to do business in and the government bureaucracies played favorites to domestic companies. However, Japan isn’t this one unified entity. There are a lot of political and political structural issues that make the policy process very slow and complicated. I go into explaining about Japanese politics here. It is very different. So what I am referencing here is the fragmentation of political incentives and the power of the bureaucracy in Japanese politics and how they can derail cooperation domestically. The prime minister isn’t a powerful position (even in the present). So getting things done in Japan was/is slow. So Prime Minister Nakasone (1982 - 1987) seemed interested in more comprehensive and easy solutions than what he could deliver through the Japanese Diet or in the consensus processes of the bureaucracies. Nakasone was a rather reform minded prime minister, but again the prime minister isn’t all that powerful. So the Plaza agreement was rather simple just dealing with the finance ministers and central bankers. Nakasone essentially blessed the finance minister Takeshita to sign the agreement and represent Japan’s best interests. The narrow goals were not really too much to handle.

So what happened? So first they communicated the agreement to the markets. Then deployed the agreement. The central banks of each country began selling dollars and buying respective currencies. So first the US began buying yen and marks in New York. The Japanese and Germans began buying their own currencies using dollar reserves when their markets opened. There were rebounds in the dollar, but more selling pushed the dollar back down because they had agreed to contribute a certain ‘war chest’ or a certain dollar amount in buying and selling currencies. It was in the billions, but this money was either in reserves or created out of thin air. The yen strengthened more than expected from 240 - 220 to about 200, but it appreciated to about the 170 range. The yen fell further overtime, but that wasn’t necessarily Plaza alone at work. There were other factors over time at play such as the further dollar weakness, interest rates, and strong demand for Japanese goods in the later years. So they actually reached their targets of devaluing the dollar by 10 percent.

So many economists generally agree the narrow goals of Plaza were successful. It did balance currencies better. The US trade imbalance went down after a few years, but was knocked out of balance by the US’ own doing. The calls for a trade war largely died down. Congress did enact several sector tariffs so there was more narrow and piecemeal barriers put up in response to Japan’s trade policies than comprehensive aggressive actions. The US and Japan tried to negotiate deals, but not all were successful at making trade more fair. The further exchange rate changes later on also began to make trade fairer and so when the yen hit 100 - 140 yen per dollar, it made Japanese exports very expensive.