Plaza Accord Myth Exposed: Understanding China's Economic Restructuring

The Plaza Accord of 1985 has become a point of reference in discussions about China's economic policies, particularly its currency valuation. However, the conventional narrative surrounding the Plaza Accord is flawed and oversimplified.

The myth that the United States forced Japan to accept a sharp appreciation of the yen, leading to its economic collapse, is often cited as a warning against similar actions being taken against China. This interpretation is based on a misunderstanding of the circumstances surrounding the Plaza Accord and its intended effects.

According to Michael Pettis, an expert on China's economy, Japan itself recognized the need for a broader restructuring of its trade and industrial structure. The Maekawa Commission, set up in 1986 by former prime minister Nakasone Yasuhiro, argued that Japan needed a 'historic' transformation away from an economy dependent on external demand and toward one led by domestic demand.

The commission's report called for reducing Japan's overreliance on trade surpluses and domestic investment, increasing domestic consumption, and making imports cheaper. A stronger yen was seen as part of this transition, intended to reduce the purchasing-price advantage enjoyed by Japanese exporters while increasing the real purchasing power of Japanese households.

This logic applied not only to Japan but also to Germany, which had similar imbalances in its economy. The adjustment needed to be broadly symmetric: surplus countries would rely less on exports and more on domestic demand, while deficit countries would rely less on domestic demand and more on production for export.