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Weekly Comment IconThe success of countries in the past, of pushing their own currencies down without creating problems, is extremely limited. I don’t know of any case where any country has done this and been happy about the end result.
Paul Volcker, Chairman of the US Federal Reserve, October 1985.

On 22 September 1985 at the Plaza Hotel, New York, the G-5 nations (Japan, France, West Germany, the United Kingdom and the United States) signed an agreement to devalue the US dollar – known as the Plaza Accord.

Between 1980 and 1985, the dollar index had appreciated by almost 78% as the US Federal Reserve embarked on a period of interest rate rises, to try and stem the growth rate of money supply and in turn suppress inflation, which had reached 13.5% by 1980.

This monetary policy coincided with the US economy facing considerable challenges as it slumped into recession, with unemployment rates the highest since the Great Depression and the recessionary landscape contributing to a number of bank failures. By the end of 1982, the Federal Deposit Insurance Company (FDIC) had spent $870m on keeping banks afloat.

And so, with the Plaza Accord agreement in place, the concerted effort of world central banks, and USD10bn later (an amount today that seems largely irrelevant), the dollar index fell by 44% and depreciated against the Japanese yen by a hearty 54%.

Despite the signing of the Louvre Accord in 1987, to halt the decline of the dollar, the sizeable consequences of the Plaza Accord had been set in motion.
Such consequences have been well versed by those far more articulate than myself, but the synopsis is that Japanese economy never recovered from this episode, ultimately leading to the boom and bust of the late 1980’s and 90’s. The latest chapter in the Japanese obituary is the Bank of Japan’s (BoJ) pursuit of Negative Interest Rate Policy (NIRP). The European Central Bank did something similar, 24 months ago, and many argue it is too early to tell if it’s working. Which in short means it’s not working.

On 1 March 2016 Japan (the most heavily indebted G7 nation) sold a new 10-year bond with a negative yield for the first time. A landmark occasion not necessarily to be celebrated.

It is perhaps just a matter of time before Germany does the same. Which will be of little surprise, given that by 2015 year end, a third of all eurozone government debt was already in negative yield territory.

In the current climate, many economies explicitly or otherwise appear content to intervene in their currency market as and when suits. We therefore question whether the days of coordinated central bank policy similar to the Plaza Accord are behind us. Instead the element of ‘surprise’ such as the BoJ’s pursuit of NIRP is the future.

Inevitably, for every currency debasement, there will be a consequence that is not immediately apparent. As Chairman Volcker also remarked in 1985 “When you start to devalue… you’d better watch out… it’s hard to know where it ends.”

The Plaza Accord


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