When Tokyo Out-Valued America

What we can learn from Japan’s bubble economy

Illuminated advertising signs near Shinjuku station in Tokyo, Japan 1985/ image via Flickr user Canada_Good

In 1985, representatives from Japan and the United States signed a deal to reevaluate the Japanese Yen at Plaza Hotel in New York City. As a result of this accord, the value of the Japanese Yen soared to double the value of the Dollar. This deal was what started one of the biggest economic bubbles in human history.

Before the Bubble

The United States insisted on the Plaza Accord because Japan’s undervalued Yen put Japanese exports at advantage over American exports. Lower valuation of Yen meant that Japanese manufacturers could export and sell goods at lower and more competitive price. To prevent losing more money on their trade with Japan, the United States came up with a deal to adjust the value of the Yen. With in a year from the deal, the Japanese Yen was valued as twice as high as the Dollar.

Plaza Hotel in New York City (New York Post)

With less competitiveness in the export market, Japan experienced a decrease in GDP in 1986. To stimulate the stagnant economy, the Japanese government chose two strategies:

• To halve the national interest rate from 5% to 2.5%