The Japanese economy has struggled for the past 20-years… The Plaza Accord is to blame

Julie Brownlee, Fsp Invest, 30 Dec. 2014

Tags: plaza accord, what is the plaza accord, us dollar, japan, japanese economy, strong dollar, dollar

The Japanese economy has suffered two decades worth of struggling economic growth.

Over this time, the global economy has had its ups and downs, but Japan has battled to keep its economy ticking over.

So why has the Japanese economy not recovered?

Let’s take a closer look…

The world’s biggest powers took steps to reign in the mighty dollar

In the early 1980s, the US dollar strengthened significantly against its major trading partners’ currencies.

At that time, Ronald Reagan was the president of the US. His government wanted to reduce the rate of inflation the country was experiencing.

To deal with this, the US Federal Reserve hiked interest rates sharply.

With a higher interest rate, the number of people buying dollars rose. This pushed up its value.

This caused problems for businesses in the US. The strong dollar made their goods more expensive overseas and imports into the States cheaper.

Some US businesses started to lobby politicians to shield them from foreign rivals.

The Plaza Accord brought an end to a strong dollar, but hit the Japanese economy

To prevent a trade war, the US along with Japan, West Germany, France and the UK signed an agreement at the Plaza Hotel in New York in 1985: The Plaza Accord.

The agreement meant they would intervene in the currency markets to drive down the value of the dollar by selling dollars.

The agreement had the desired effect. Over the next two years, the value of the dollar fell 50%.

But there was one casualty from the Plaza Accord: Japan. The weakening dollar and a stronger yen hit the country’s exports hard.

In a bid to boost its economy, Japan cut its interest rates. This led to a credit boom and a price bubble in its stock market and property market.

In 1990, the bubble burst. To this day, the Japanese economy still hasn’t recovered.

So there you have it. Why you can blame the Plaza Accord for the struggling Japanese economy over the past 20-years.

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