Plaza Accord Case Study

On September 22, 1985 the world economic powers called "G.5" which comprises the United States, the United Kingdom, France, West Germany and Japan held a conference in the Plaza Hotel in New York City. The agreement was named Plaza Accord according to its location of a meeting. The Plaza Accord is assigned to each key member of the G.5 to devalue the US dollar as well as revalue the Japan yen with the aim of mitigating the US current account deficit as well as helping the country to recover from the severe recession. In 1970s, The US had experienced the stagflation crisis and its Federal Reserve Boards members coped the situation by raising interest rates resulting in revaluing 50 percent of dollar in relation to the Japanese yen, French Franc,

Japan has set out the accommodated policy of both expansionary monetary and fiscal policy. The Bank of Japan has lowered its discount rate from 5 percent to 4 percent in 1986 and cut it further to 2.5 percent in 1987. The expansion of bank 's lending to the subprime resulted in increasing attractiveness of borrowing money. However, most of the borrowed money went into real estate and the stock market owing Japan financial liberation in the 1970s and 1980s. In the mean time, the loose fiscal policy, government spent billion of capital on public work projects investment such as road, bridge and stadium. As a result of both loose fiscal and monetary policies, a countries had experienced a serious recession

By 1986 the recession has already over, Japanese economy was recovering vigorously. However, the slow wheel of the government of Japan didn 't pass its expansion fiscal packages until 1987. This excessive boost of both fiscal and monetary policies to an already booming economy caused disaster. As a result of this, the asset price bubble directed economy into recession in early 1990’s. Furthermore, Japan did mistake for a second time. The asset price bubble 's crisis was poor managed, as Japan’s government did not compel its banks to write off bad loans. On the contrary, it urged the banks to continue lending to insolvent companies to avoid such write-off. The underlying fault behind the crisis was the Japanese labor market 's structure. Japanese firms cannot make workers redundant due to the strong labor unions leading to the decrease in productivity of Japan as well as deflationary