25 Years of the Plaza Accord

Mired in trade and fiscal deficits in the 1980s, the U.S. government blamed the problem on the overvaluation of the U.S. dollar compared to the Japanese yen or the German mark. Economics teaches that a widening trade deficit leads to a currency`s depreciation, which boosts export competitiveness. The dollar`s value, however, did not fall as Washington pursued a policy of high interest rates to cover fiscal deficits that prompted an inflow of overseas capital into the country. Japan and Germany welcomed the strong dollar since it boosted their exports to the world`s largest economy.

On Sept. 22, 1985, the U.S. government held a G5 financial ministers` meeting at the Plaza Hotel in New York to tackle its currency problem. At the meeting, then Treasury Secretary James Baker urged an adjustment for the strong dollar, resulting in the Plaza Accord agreed on by the U.S., U.K., Germany, France and Japan. Under the accord, major currencies including the yen and mark were appreciated to improve the U.S. trade balance and countries involved were to intervene in the foreign exchange market to enable this. As the leader of the free world amid the Cold War, the U.S. exercised its powerful influence 25 years ago.

Following the Plaza Accord, the yen surged from 260 per dollar to 122 at the end of 1987. Japan overcame the effects of the strong yen through advances into overseas markets and cost cutting, only to suffer from side effects such as the bubble economy and the ensuing "lost decade." In April 1995, the yen-dollar rate fell to 79.75. G7 countries agreed to depreciate the yen, eventually creating the "reverse Plaza Accord." While Korea`s three-lows -- low value-added products, low wages and low currency value -- was not irrelevant to the high yen, Korea`s currency crisis in 1997 was also in part due to the reverse Plaza Accord.

On Wednesday, the yen hit 82 per dollar, its highest value against the greenback in 15 years and four months. In response, Tokyo and the central Bank of Japan sold yen and bought dollars, intervening in the foreign exchange market for the first time in six and a half years. Japanese Prime Minister Naoto Kan said, "We could no longer accept excess volatility in the foreign exchange market." Yet major economies including the U.S., Europe and China have shown no intention to join Japan`s efforts to curb the yen`s value since they want their own currencies to weaken for the sake of export competitiveness. The currency war originating from Japan could hugely affect Korea`s economy, and this requires Korean foreign exchange authorities to closely watch movements and promptly deal with adverse situations.

Editorial Writer Kwon Sun-hwal (shkwon@donga.com)