Why the Plaza Accord is still the gold standard

The years have been kind to the Plaza Accord. The high point of post-World War II financial diplomacy, the deal sought to jolt foreign-exchange markets and engineer a weaker dollar — within limits.

Despite many pretenders in the years since, few agreements have come close. Legitimate critiques of the contemporary greenback-centered world notwithstanding, suggestions that such a grand bargain could be replicated today are wide of the mark. Plaza was in a class of its own.

The pact among finance ministers and central bankers on Sept. 22, 1985, at the iconic Manhattan hotel, which was bought by Donald Trump a few years later, was remarkable for its forthrightness. And for the commitment of the players. Japan bore the brunt of the wrenching adjustments to follow and the document would become an occasional point of contention in the blame game over the country’s Lost Decades. The yen rallied from around ¥240 per dollar in the weeks before the meeting to the vicinity of ¥145 within two years, a massive appreciation that took a toll on manufacturers.

China, which wasn’t at the meeting — its economy was tiny at the time — has used the bogey of Plaza as justification for keeping control of the yuan and resisting Western entreaties to open key sectors of its economy. Two decades after dropping a hard peg to the dollar, Beijing only allows a small amount of flexibility and will likely drive a hard bargain with Trump, now U.S. president, in trade talks.

The Group of Five — current Group of Seven members Canada and Italy weren’t present — announced that "further orderly appreciation of the main nondollar currencies is desirable.” Japan pledged to allow the yen to "fully” reflect the underlying strength of its economy, which was then on a roll. That was a euphemism for Japan allowing — or encouraging — the yen to become significantly stronger.

While Tokyo still steps in when moves or levels are judged extreme, frequent intervention is a thing of the past. It would be a mighty struggle to persuade China, which jealously guards its sovereignty, to sign anything as binding today while on U.S. soil — no matter how appealing the idea of a "Mar-a-Lago Accord” may seem.

China looks at Plaza as though it was a trap set by Washington to contain the rise of Japan. But Tokyo largely doesn’t have this view. Mainstream consensus is more self-critical; some might blame the accord, but more focus on how the authorities of the day chose to respond to it. Takatoshi Ito, a Columbia University professor and former ministry of finance official, has described "a bit of 'Rashomon' effect” surrounding Plaza, referring to the 1950 Akira Kurosawa movie with its differing accounts of what really happened.

Indeed, Tokyo was more than happy to participate. Unlike the Bretton Woods system of fixed exchange rates, designed in the closing stages of the war, and the rug-pull of the "Nixon Shock” that undid it three decades later, Japan was afforded a seat at the table. If Plaza seemed a little onerous, to ask more of Japan than the other parties was merely a reflection of Tokyo’s growing international stature.

A huge difference between Japan of the 1980s and the China of today is that Tokyo desired not just to play by the rules, but to be inside as part of the system that shaped them. China has been more tactical — paying lip-service to rules but in reality, doing everything it can to skirt them. Both impulses have at their heart grievances in dealings with the West that go back centuries. None of us, after all, can escape our history.

Instead of cursing Plaza, most in Japan look inward to the combination of policy mistakes and national frenzy that inflated the asset bubble that followed. In seeking to offset the sudden pain being felt by exporters as the yen appreciated far beyond what Tokyo targeted, the pre-independence BOJ pushed interest rates too low. It later overreacted, popping the bubble in 1989 with a series of hikes. (Monetary policy in the U.S. might also explain the dollar’s post-Plaza decline. Writing in the Financial Times earlier this year, former Federal Reserve Vice Chair Richard Clarida noted that U.S. rates were cut significantly as inflation abated.)

Testament to Plaza’s potency was a compact in Paris in 1987 aimed at quelling the forces it unleashed. Attempts to depict subsequent ministerial mumblings as redolent or somehow heralding a sequel fall short. Some, with the benefit of hindsight, are embarrassing. Among them was chatter about a Hyundai Accord, named for a South Korean hotel where Group of 20 ministers were to confer in 2010. I’ve seen communiques rated by their likeness: son of Plaza, daughter of, cousin of. Nothing of anything like the same consequence emerged.

Another key to understanding Plaza and why it may never be repeated lies in recognizing the singularity of the moment. The Cold War raged and Japan and West Germany were dependent on their American sponsor. Markets were sizeable, but nowhere near their current scale. Governments couldn’t buck markets, but their ability to steer them was substantial, far more so than now.

There are three other ingredients that you’d be hard pressed to locate today: trust, a key person at the center whom interlocutors knew spoke for the Oval Office and secrecy. Few U.S. Treasury bosses enjoyed the prestige of James Baker, a former chief of staff to Ronald Reagan and future secretary of state. (A biography in 2021 called him "the man who ran Washington.”) Trump’s Treasury chief, Scott Bessent, doesn’t have the same clout.

Part of Baker’s motivation was to stymie the protectionist sentiment building in Congress. Then, as now, trade deficits were a ripe target. An iconic image of the era was of lawmakers smashing a Toshiba radio. But unlike Trump, who offloaded the hotel in 1995 and loves tariffs, Reagan sought to constrain protectionism.

Rather than grieve Plaza, salute it. The deal reflected a confluence of national interest, diplomatic nous and a sense that common interests dictated collaboration. Multilateralism was favored, not shunned. The accord also focused on what was achievable — and who could be relied upon.

No doubt efforts to rewrite motives and outcomes will persist. Nothing of significance escapes that fate.