My Historical Shock Experience ~ Plaza Accord ~ [Waterborne Travelogue]

Looking back on economic trends, there have been various historic shocks in the past, such as the Lehman Brothers collapse and the Swiss franc shock. Because major events that affect the global economy may occur in the future as well, it’s natural to be concerned about how to confront such financial crises. Here, I would like to have Noriyuki Mizukami discuss one of these historical shocks, the Plaza Accord, and share how he dealt with it at the time.

※This article is a reprint and remodification of an article from FX攻略.com, November 2018. Please note that the market information stated in the text may differ from current market conditions.

Profile of Noriyuki Mizukami

Mizukami Noriyuki. President of Banya Market Focus. After graduating from Sophia University with a degree in Economics in 1978, he joined Sanwa Bank (now part of Mitsubishi UFJ Financial Group). After five years in branch duties, he worked as a currency dealer in London, Tokyo, and New York. In the Tokyo Foreign Exchange Market, he is known as “Mizukami of Sanwa.” He served as Foreign Exchange Department Head at Dresdner Bank, and at RBS Bank, Foreign Exchange Department Head and then Head of Foreign Exchange Sales. Since 2007, he has led Banya Market Focus. He is well known for highly accurate market forecasts based on long years of experience and knowledge.

Dollar/Yen fell from 240 to 80 over 10 years

Currently, the Trump administration’s trade policies are controversial, but 33 years ago the Plaza Accord—an international trade negotiation with Japan—caused substantial damage to Japan. Yet Japan overcame the disaster and continued to grow. As we reflect on the Plaza Accord, I would like to share how I dealt with the market at that time.

The Plaza Accord, on Sunday, September 22, 1985, during a meeting of finance ministers and central bank governors from the G5 (Japan, the United States, the United Kingdom, Germany, and France) in the Plaza Hotel in New York, was agreed upon to conduct substantial currency adjustments (yen appreciation) to correct Japan’s trade imbalances.

The news that “the G5 would agree on substantial currency adjustments over the weekend” reached the chief dealer in New York on the Friday of the previous week and was relayed to the chief dealer in London where I was. The London chief dealer’s face flushed with emotion, and as soon as he hung up, he started selling dollars and yen with all his might. That scene is unforgettable to this day.

Moreover, on the very next day, Monday, there was a 20 yen move in USD/JPY, with the dollar weakening and the yen strengthening. What did the Japanese Ministry of Finance and the Bank of Japan do at that time? They intervened by selling dollars in USD/JPY and guided interest rates higher to encourage more yen buying. They did something that pressed on Japan’s exporters just as they were turning pale, revealing how little diplomatic power Japan had at that time.

This market move continued for ten years, and USD/JPY, which had been 240 before the Plaza Accord, fell to 80 by 1995. In other words, a 160 yen appreciation of the yen and a drastic devaluation of the dollar. Over ten years, the value of the dollar dropped to one third, while the value of the yen rose threefold.