Thanks to sustained high interest rates in the United States, the dollar has been soaring against other currencies. That’s bad news for domestic U.S. producers and good news for those abroad.
These developments hark back to the conditions that led to the 1985 Plaza Accord, which transformed a dominant Japan into a country whose productivity growth lagged behind that of other developed countries. To be sure, Japan was simultaneously facing a technical slowdown and a rapidly aging population, but the Plaza Accord, named for the New York City hotel where it was negotiated, was a crucial factor in its economic stagnation.
In hindsight, the Plaza Accord did deliver some of the desired outcomes, at least for the U.S., by raising the value of the yen and curtailing Japan’s decades-long growth spurt. And the negative consequences for Japan were partly the result of the Bank of Japan’s overly hawkish monetary policy.