Is Japan Manipulating the Yen?

Trump’s renewed focus on exchange rates has brought attention to the potential for a “Plaza Accord 2.0,” though experts remain skeptical about its viability.

According to Trump, Japan is intentionally pushing for a weaker yen to give Japanese exports an advantage in overseas markets. From his point of view, this contributes to America’s trade deficit and undermines U.S. manufacturing. However, many in Japan see a different reality. Consumers there are struggling with rising import prices—such as paying nearly 190 yen for a 500ml bottle of cola—and find Trump’s criticism out of touch with current economic conditions.

Trump’s broader goal appears to be a weaker U.S. dollar. He believes that if the dollar falls in value, American exports will increase, helping to revive domestic industries and reduce the trade imbalance. This logic mirrors the effect a weak yen has on Japan's exporters and has become central to Trump’s pitch for economic revival through protectionist measures.

Still, many economists warn that the global economy no longer operates in ways that would make such a strategy easy to execute. A weaker dollar could lead to higher inflation and erode international trust. Moreover, if trading partners experience downturns or retaliate, American exports could still suffer, despite a favorable exchange rate.

The historical precedent Trump refers to—the 1985 Plaza Accord—was a coordinated effort by major economies to lower the value of the dollar. The result was a sharp rise in the yen’s value, which hurt Japanese exporters and contributed to economic stagnation in Japan. Now, Trump’s vision of a new agreement has been dubbed “Plaza Accord 2.0,” with speculation it could even take place at his Mar-a-Lago estate.

Yet financial analysts believe such an outcome is unlikely. A multilateral agreement would require strong international cooperation, which is currently in short supply. If an accord were somehow reached, the likely consequence would be a long period of yen appreciation. This could damage Japan’s export sector, reduce consumer demand, and possibly push the country back into deflation.

Trump’s proposal hinges on a belief that the U.S. can win by weakening the currencies of its trading partners. But in today’s deeply interconnected economy, such a move could easily produce unintended consequences. If global demand declines or retaliatory measures are introduced, the U.S. may find itself no better off—and possibly worse.

With Trump showing the same assertive stance that defined his first term, he seems determined to pursue the same economic policies if he regains the presidency. Whether a new Plaza-style agreement can be created, or whether it would even work in the current economic climate, remains uncertain. For now, Japanese officials and global financial leaders are watching the situation closely, hoping to prevent any large-scale disruption.

The 1985 Plaza Accord was a landmark agreement among five major industrialized nations—the United States, Japan, West Germany, France, and the United Kingdom—to intervene jointly in foreign exchange markets in order to depreciate the U.S. dollar relative to the Japanese yen and the German Deutsche Mark. The meeting took place at the Plaza Hotel in New York City on September 22, 1985, and was driven by growing concerns over the large U.S. trade deficit and the high value of the dollar, which had appreciated sharply in the early 1980s. This strong dollar made American exports more expensive and less competitive globally, while making imports cheaper and widening the U.S. current account deficit. Meanwhile, countries like Japan and West Germany, with substantial trade surpluses, were under pressure from the U.S. to contribute more to correcting global imbalances.

The context of the Plaza Accord lies in the economic policies of the early 1980s, particularly the Reagan administration’s combination of expansionary fiscal policy—through tax cuts and increased military spending—and tight monetary policy led by Federal Reserve Chairman Paul Volcker, which had pushed interest rates high and attracted foreign capital. This caused the dollar to soar in value, peaking at nearly twice its 1980 level by 1985. American manufacturers, especially in industries like automobiles and electronics, struggled to compete with Japanese and German imports, and political pressure mounted for the government to take action. The Reagan administration, which had previously endorsed market-determined exchange rates, shifted its stance and initiated discussions with key allies to engineer a dollar correction.

At the Plaza Hotel meeting, the finance ministers and central bank governors of the five nations announced a coordinated strategy to depreciate the dollar through concerted intervention in currency markets. The statement, brief but powerful, indicated a mutual understanding that exchange rates should better reflect economic fundamentals and that a weaker dollar was in the interest of global stability. Following the accord, central banks began selling dollars and buying other currencies, especially the yen and the Deutsche Mark, signaling a rare moment of international cooperation on exchange rate policy.

The impact of the Plaza Accord was swift and significant. Over the next two years, the dollar fell by more than 40 percent against the yen, dramatically altering trade flows and financial markets. For Japan, the yen’s rapid appreciation led to a sharp decline in export competitiveness, which prompted domestic economic stimulus measures to offset the slowdown. These policies, combined with easy monetary conditions, eventually contributed to the formation of Japan’s asset price bubble in the late 1980s. Meanwhile, in the U.S., the weaker dollar helped reduce the trade deficit somewhat, but it also raised import prices and contributed to inflationary pressures.

In retrospect, the Plaza Accord is often viewed as a rare example of successful international policy coordination, though its longer-term consequences were mixed. While it temporarily alleviated trade tensions and stabilized the dollar, it also exposed the difficulty of managing complex interdependencies in the global economy. For Japan, in particular, the aftermath of the agreement set the stage for a volatile period of boom and bust.

Source: Kyodo