With practically every major (and minor) country attempting to devalue their currencies, in order to make exports more competitive, the pressure builds on China to ease some pressure revalue the yuan upward.
This has an important historical parallel in the famous Plaza Accord of 1985, when the world’s major governments met to strengthen the yen and weaken the dollar.
Asia Times has a worthwhile read on the Plaza Accord, and the similarities and differences between Japan then and China now, and their respective relationships with the US. Perhaps most worrisome is that Japan’s relationship with the US — despite some trade friction — was way better than what China’s is with the US today.
The G-5 finance ministers hunkered down at the Plaza Hotel in New York on September 22 and decided to intervene cooperatively in the foreign exchange markets to guide the excessively high value of the US dollar lower as a means of enhancing the US’s export competitiveness and trim its enormous trade deficits. As a result, the Japanese yen’s value vis-a-vis the dollar doubled in only about two years, from 240 to 120 a dollar.
The sharply higher yen prompted Japanese manufacturers to rush to shift production abroad, especially to Southeast Asia, to take advantage of cheaper labour there. Japanese automakers, which were particularly on the hot seat at the time amid raging trade protectionism in the US, also accelerated production in that country, not only to weather the stronger yen but to ease trade friction. In the early 1990s, the number of vehicles they assembled in the US exceeded that of their US-bound exports.
To help cushion the impact of the stronger yen on its economy in the wake of the Plaza Accord, Japan kept its monetary policy loose to stimulate domestic demand, but did so longer than necessary, resulting in the “bubble economy” of the late 1980s characterised by inflated prices for assets such as stocks and land.
Japanese exports to the US did not decline despite the Plaza Accord, however. And trade friction lingered and “revisionism” gained strength in the US, prompting the country to take a new tack on bilateral trade issues. Read the whole thing >
Here’s what the world’s major currencies did after the agreement:
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