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Commentary & Analysis
Japan the currency warrior? Give me a break!
Funny how institutional memory among our financial elite seems to get fuzzy when their own objectives blur reality; I am speaking of currency manipulation past. Grey hairs or students of the currency market (guilty of both I am), and a good friend of mine who was there, in the White House at the time, remember. It was called the Plaza Accord. [Carried out by the G-5: France, US, West Germany, Japan and the UK agreed to push down the value of the dollar by intervening in currency markets.]
My friend summarized it this way to me: “Jimmy [Jim Baker who had switched places with Donald Regan to go from Chief of Staff to Treasury Secretary in 1985] just got these guys together and did it. Those of us in the White House, and even RR [Ronald Reagan], really weren’t involved much at all.]"
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The stated objective of the Plaza Accord, for public consumption, was to lower the value of the US dollar—it was “too high.” American industrial players were petitioning government daily for relief. Imaging that! But the implicit objective of the Plaza Accord was to punish the Japanese by pushing up the value of the yen in an attempt to slow the Juggernaut of world’s second largest economy at the time, expected to become the largest and swallow up the world’s key assets (sound familiar as we fast forward 27 years and China is now in that role)…ah, the rhyme of history.
[One other key point here; back in 1985 the relative size of the currency market was much smaller when compared to the firepower of the central banks—no longer. Now, the size of the market dwarfs central bank firepower. That means an agreement such as the Plaza Accord would be much more difficult to engineer today unless it was done so in the direction of a major trend change driven by Mr. Market.]
In this long-term chart of the US dollar index, which I shared during my forex workshop last Saturday, I have labeled the Plaza Accord (actual date was September 22nd 1985):
So let’s take a look at what the Japanese yen has done since the Plaza Accord:
Looked at this with dollar as the quote currency:
1 Yen was worth about 0.004165 US dollar on September 22nd
1 Yen is now worth about 0.01111 US dollars today
That represents an appreciation of 167% in dollar terms.
That type of appreciation has put massive pressure on Japanese industry. And now, Japan wants to see a change in this trend.
The big reason why Japan wants to see a change is because it is no longer producing a current account surplus, a trend change in that statistic for the first time since the early 1980’s—that in itself proves that if you are a key ally of the US and properly structure your trade barriers (and get very little grief from US officials because you are very much needed as a counter weight to the growing competition for global hegemony, i.e. China), and have a homogeneous and focused work force/culture, you can endure a lot of currency pressure.
But the bottom line is this: 1) For Western financial types to suggest the Japanese have not shared their burden of currency pressure proves they are either clueless or duplicitous, and 2) to pretend the rest of the major central banks possess any shred of independence they once had is downright laughable. All major central banks have become pure government conduits as monetary policy substitutes for fiscal stimulus and any real creativity on the part of governments to make the difficult structural reforms whereby new growth can flourish.
More to come on this topic, as the term “Currency Wars” becomes an increasingly popular thematic chatted up by the financial class. Currency is a relative game, every decision to buy a currency is a decision to sell it against another, so the warriors and the impact in a world seeking capital flow are not as easy to identify as most would have you believe.