Korean currency fell to 1,056 against the U.S. dollar on Monday, falling below the 1,060s range for the first time in three years and five months. The 1,060s range is considered to be the psychological Maginot Line. “An agreement (memorandum of understanding) is being finalized on robust provisions to prohibit competitive devaluation and exchange rate manipulation in order to promote a level playing field for trade and investment,” announced the U.S. Trade Representative in a press release on the result of the KORUS FTA negotiations. The currency market concluded that this phrase could restrict decision-making of Korea’s exchange rate authorities in the future. Various terms such as New Plaza Accord, the Second Plaza Accord, Korean Plaza Accord and Trumplaza (Trump+Plaza) are coined to refer to this agreement.
Finance ministers of G5 countries — the United States, the United Kingdom, Germany, France and Japan — gathered at the Plaza Hotel in New York on September 22, 1985. The purpose of the agreement was simple: to devalue U.S. dollar and reduce global imbalances through fiscal and monetary policies. The Japanese Yen bore the brunt of this agreement and fell to 122 yen in 1987 and 79.75 in April 1995 from the 260s range. This triggered Japan’s 20-year economic downturn. A Japanese university professor said that the agreement was as shocking as Japan’s defeat in the Second World War.
Then Japanese Finance Minister Noboru Takeshita who signed the agreement said, “The United States surrendered to Japan.” It was a political rhetoric that the strong yen beat the weak dollar, which he admitted was a mistake later. “I believed 10 to 15 percent fall in our currency was bearable,” then Japanese Prime Minister Yasuhiro Nakasone recalled, saying Japan had to make a concession because of security issues with the United States.
The Korean government said that the currency issue was not related to the KORUS FTA, and had been discussed as a separate issue. If they have agreed or agree to an agreement that could seriously undermine Korea’s exchange rate autonomy, the history will record them as the culprit who ruins Korean economy.