By Nalliah Thayabharan

The Japanese economy was the biggest economic miracle in the 20th century after the United States,but a grim turning point occurred when the Plaza Accord was signed.

Japan’s GDP was less than $0.5 trillion in 1960, yet just 3 decades later, the economy grew to a stunning amount of over $3.1 trillion by 1990 and a further growth was seen where the Japanese economy peaked at $5.5 trillion in 1995. The gap between the US and Japan was very small in 1995 where the U.S. economy stood at just $7.6 trillion.

This was a pivotal moment that led many to believe Japan was going to surpass the United States. Other metrics even already showed that Japan had catched the U.S., For instance, in GDP per capita, Japan had overtaken the U.S in 1987 and had seen a big gap between the two nations in 1995. This was indeed an economic miracle. There was no other nation globally other than China that came close to overtaking the U.S.

But as many know the story wasn’t a happy ending. We saw the eventual stagnation of Japan’s economy not for one decade, nor two decades, but over three decades. Since 1995, Japan has not grown at all.

The U.S. played a very significant role in Japan’s slowdown. These all started from the decades leading up to  the 1980s. From the 1970s, Japan had established itself as a global manufacturing powerhouse, dominating industries such as automobiles, electronics, and machinery. These were the very same years that gave birth to Japan conquering a huge portion of the  semiconductor industry and saw the rise of Japanese automotive companies like Toyota. The semiconductor industry was one of the most pivotal aspects behind Japan’s rise, and had also played a key role in its stagnation.

In 1981, 70% of the market share in 64kb dynamic random-access memory (DRAM) chips was captured by Japan, with the remaining 30% by the United  States. Japanese companies like HITACHI, FUJITSU, and NEC were market leaders in this category. 64K DRAM memory chip was a technological marvel at the time. DRAM chips are critical components in computing devices, acting as temporary storage that enables faster processing of data compared to traditional storage like hard drives. In the early 1980s, the 64K DRAM represented the cutting edge of semiconductor technology, and its production showcased a country’s ability to lead in the tech-driven global economy.

It was in this industry, as well as others, that  gave rise to a concept called trade surplus. The U.S. has been exporting substantial amounts to Japan of billions of dollars, but at the same time,the U.S. has also been importing massively – much more than they export to Japan. This has then caused a trade surplus for Japan, and a trade deficit for the U.S.

There was a significant imbalance forming between the two economies. Japan’s trade surplus indicated that it was selling more goods to the U.S. than it was buying, leading to an accumulation of wealth and foreign reserves in Japan. This trade surplus for Japan then became an important part of Japan’s economic rise. From 1960 to 2000, they have gained a massive amount of total reserves, thanks to their strong exports globally and to the U.S. In the year 2000, Japan was even the world’s largest holder of total reserves with over $361 billion, a figure that far surpasses any other nation.

The trade imbalance between the U.S. and Japan had then become a source of political tension. American manufacturers, particularly in industries like automotive and electronics, felt increasingly threatened by cheaper, high-quality Japanese imports. As pressure mounted, the U.S. sought a solution to rebalance  global trade flows and reduce its deficit. This led to one of the most dramatic policy decisions in post-war economic history: the Plaza Accord.

On September 22, 1985, representatives from the G5 nations—the United States, Japan, Germany, France, and the United Kingdom—met at the Plaza Hotel in New York City. Their goal was to address the overvaluation of the U.S. dollar, which had appreciated by 44% against major currencies between 1980 and 1985.

The agreement was clear: the G5 countries would intervene in currency markets to weaken the dollar while allowing other currencies, particularly  the Japanese yen and the German Deutsche Mark, to appreciate. For the United States, this was a strategic move to make its  exports more competitive and reduce its  trade deficit. For Japan and Germany,it meant assuming a larger share of global demand by strengthening their currencies.

Initially, the plan seemed to work. The dollar depreciated by 40% between 1985 and 1987, and Japan’s trade surplus began to shrink. However, the yen’s appreciation turned out to be far steeper than anticipated. By the end of 1985, the yen had surged by over 50% against the dollar, sending shockwaves through Japan’s export-reliant economy.

From 1978 to 1985, Japan’s exchange rate to the US dollar was consistently trading around  210 to 249 yen to a dollar. Yet, by 1986 and further years, the yen had appreciated falling  to as low as 128 yen to a dollar by 1988. These were just a couple of years, and a huge surge in a country’s currency in such a small time frame was a recipe for disaster.

Whenever a country’s currency rises in value this makes their products more expensive on global markets. This would then cut deeply into their profits. The exports of goods and services as a percentage of GDP in Japan was 13.6% in 1985, yet it fell to 9.4% by 1988.

In 1984, the annual growth rate of Japan’s exports of goods and services was over 15.4%, yet by 1985, it fell  to 5.3% and then a contraction of 5% in 1986. This was largely because of the sharp increase in the yen’s value. This contraction in the export sector had a domino effect, leading to a recession in the mid-1980s.  

Faced with this economic slowdown, Japan’s policy makers acted swiftly, but their responses inadvertently laid the groundwork for future crises. To stimulate the economy, the Bank of Japan  implemented aggressive monetary easing, slashing interest rates to historic lows.

Japan’s  interest rates from 1983 to 1985 was over 5%, yet by 1987 to 1989 it fell to 2.5%. These interest rates were a response to the economic problems that the country was facing at that time. Then, on top of that, these were also accompanied by fiscal stimulus measures designed to boost  domestic demand. While these policies succeeded in reviving growth, they also fueled speculative excesses in the real estate and stock markets.

By the late 1980s, Japan was in the throes of an economic bubble. Land prices in Tokyo soared, and the Nikkei stock index tripled in value. At its peak, the value of land in Tokyo alone was estimated to be greater than the entire real estate value of the United States.

For a time, it seemed as though Japan was on  an unstoppable upward trajectory. The stock market of Japan was probably one of the best ways to understand this rise in speculative excesses. There was an insane rise in stock trade in value from 1985 to 1988, the same years when Japan’s economy had started to see the effects of the Plaza Accord.

In 1985, the total value of stocks traded was just a mere  small sum of $455 billion, yet three years later in 1988 this rose to over $2.54 trillion, and a further increase in 1989 to over $2.61 trillion. But in 1990, it shrunk to $1.54 trillion,  then further contraction was seen in 1992 to just $606 billion. The value was never seen  again until 2004, nearly two decades later.

The same story can be seen in the market  capitalization of listed domestic companies in the country. From 1985, the year where the market cap of listed companies was just $948 billion, yet it rose immediately to over $4.26 trillion by 1989, and only to come down  by nearly half to just $2.25 trillion by 1992.

The United States imposed the unfair “U.S.-Japan Semiconductor Agreement” on Japan in 1986, halting Japan’s dominance in the semiconductor industry and once again hindering the revival of the Japanese economy. Exactly the same is happening to China today. They are doing the same to HUAWEI and countless other companies what they did to HITACHI, FUJITSU, and NEC.

Since Douglas MacArthur entered Tokyo, Washington has been in charge of Japan, not Tokyo. Japan is a satellite of the US, a geopolitical term, which means that it is dependent on the US, after all the US is still occupying Japan. They have military bases there, just as they are occupying Germany.  Now the USA is doing the same to Germany. What is happening to Germany is fatal. It may be dangerous to be America’s enemy, but to be America’s friend is fatal.

This strange suicide by the Japanese is just like the suicide of the EU, in which the EU politicians happily destroyed the only advantage they had for their industry in international markets by boycotting the cheap Russian raw materials and the cheap energy that the Russians gave them.

Japan with its short sighted political leaders will never break free from America . Even if they wanted to, their master will never let that happen. 

The Plaza Accord caused Yen to appreciate, reducing export competitiveness. In response, the Japanese government implemented accommodative monetary policies to boost domestic demand, leading to a sharp rise in asset prices, particularly in stocks and real estate. Much like China today, many borrowed heavily for property purchases. However, when the bubble burst in the late 1980s, asset prices collapsed, banks were left with bad loans, and Japan entered a prolonged period of deflation and low growth.

During the ensuing recession, many Japanese companies moved manufacturing overseas to cut costs, with China emerging as a major destination. During the Cold War, the U.S. prioritized integrating China, viewing its growth as beneficial to maintaining the U.S.-led global economic order, and did not perceive Japanese expansion there as a threat. At the time, China was seen as a low-cost production base and a future market. Japanese firms supported China’s industrial growth by providing technical expertise and fostering mass production, laying the groundwork for its rise as the World’s Factory.”

For Japanese companies, expanding into China was not merely about cost-cutting but also about staying competitive and responding to globalization. However, the unexpected speed of technological absorption by Chinese firms led to the hollowing out of Japan’s domestic industry. Few foresaw China becoming both an economic superpower and a technological rival to the U.S. Unfortunately American antics aren’t going to work on China.