Thirty years after the implementation of the dollar-weakening Plaza Accord, the purpose of joint currency interventions has shifted significantly as enormous global markets have become increasingly resistant to coordinated sovereign influences.
The historic 1985 deal between Britain, France, Japan, West Germany and the United States brought a sharp depreciation of the dollar against the yen and other currencies.
But as market size has expanded rapidly since 2000, joint interventions have had limited impact and have become a means to soothe market turmoil at times of crises.
The Group of Five “agreed that exchange rates should play a role in adjusting external imbalances,” the accord said, referring to a “large and growing current account deficit” for the United States and “large and growing current account surpluses” for Japan.
At the time, Japan was meeting increasing criticism for the trade surplus advantage it was gaining from the weak yen, while the United States, saddled with a massive trade deficit, faced the need to protect domestic industry.
“In view of the present and prospective changes in fundamentals, some further orderly appreciation of the main non-dollar currencies against the dollar is desirable,” said the statement released on Sept. 22, 1985.
“The substance of the statement was decided swiftly, and much of the discussion was devoted to specific means of joint intervention,” said Tomomitsu Oba, Japan’s vice finance minister for international affairs who attended the meeting at the Plaza Hotel in New York.
At the closed gathering of the G-5 major economies, the U.S. government handed out a confidential, never-released document called the “non-paper” that included the planned amount of intervention and a targeted currency rate, according to Oba.
Following the discussion, the figures in the non-paper were revised to aim for a 10 to 12 percent fall in the U.S. dollar rate through dollar-selling intervention worth $18 billion, while deciding on a share of dollar selling by each country.
The concerted intervention changed the tide of the currency market. The yen, which was traded at around ¥240 per dollar, surged to the targeted level in two months and its value nearly doubled in little over two years.
But after 2000, joint interventions by advanced countries have dwindled in tandem with the rapid growth of emerging economies.
In 1985, the G-5 economies accounted for more than half of the world’s gross domestic product, but BRICS nations — Brazil, Russia, India, China and South Africa — were catching up to rank with Group of Seven advanced nations, which now include Italy and Canada.
The amount of funds traded in the foreign exchange market grew 3.5-fold in 15 years from 1998, limiting the effects of joint currency intervention.
As a result, coordinated intervention by the G-7 countries had ceased for a time since 2000, when it was conducted to support the euro from heavy selling after its launch.
It took more than 10 years until the next joint intervention was conducted to cap the yen’s rise after the massive earthquake and tsunami hit eastern Japan in March 2011, with speculative trades pushing up the yen to a then postwar record, above 76 to the dollar.
The yen’s sharp appreciation stirred fear that it would deal a blow to the Japanese economy, which was already damaged by the devastating disaster.
In the early hours of March 18, then Japanese Finance Minister Yoshihiko Noda had a telephone conversation with U.S. Treasury Secretary Timothy Geithner, telling him that Japan will step into the currency market unilaterally if it has to.
Geithner responded he would cooperate and offered to persuade European Central Bank head Jean-Claude Trichet into conducting a joint intervention, according to Noda.
In an audio conference including G-7 finance ministers and central bank governors, it was decided to carry out a coordinated intervention for the first time in 10 years and six months.
Unlike the 1985 accord, the leaders only agreed to sell the yen at their respective exchange market in Japan, and the United States and Europe at their own discretion, as the main purpose was to convey their message that disorderly moves pushing up the yen must stop.
The yen temporarily weakened, but the effects of the intervention did not last. The yen climbed to ¥75 against the dollar to set a new record high in October 2011.
Though the efforts by the G-7 nations ended unsuccessfully, Noda is convinced that the authorities need to continue showing “a fighting pose.”
“Once the authorities say ‘we won’t fight,’ they will lose means to rein in the market,” Noda said.