The World's Biggest Bubble
Do you like having lots of money? 'Only idiots and foreigners didn't get rich'
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On September 22, 1985 the financial heads of the planet’s leading economies met in The White and Gold Room of the Plaza Hotel to discuss the very dry topic of international currency and trade balance policy.
What they didn’t talk about, at least in front of the cameras, was something far more sexy: engineering a financial and real estate bubble so giant and so awesome it seemed like it would never burst.
The meeting came to be known as the Plaza Accord, named for the famed New York hotel where the finance ministers of what when then known as the G5 (the US, the UK, France, West Germany and Japan) put their signatures to the pact.
If you are in the vast majority of people who have never even heard of the Plaza Accord, the background story went something like this:
At the time of the Plaza Accord in 1985, the mighty US was mired in high interest rates and massive trade deficits.
For US manufacturers like IBM and Caterpillar, the era’s strong US dollar made their products lose competitiveness overseas and they were lobbying Congress to do something about it.
Germany’s and Japan’s ‘undervalued’ currencies, by contrast, allowed them to sell their Toyotas and Mercedes Benzes at extremely competitive prices overseas, especially in the massive US market.
The strong dollar also made US manufacturers’ products expensive at home when compared to cheap foreign imports.
All of this resulted in sagging sales for US companies that put America’s trade balance further and further into the red.
There was alarm in America’s boardrooms and hysteria on the streets.
Auto workers had mass rallies taking hammers to and running over Toyotas with monster trucks.
Meanwhile, the Japanese economy was humming along like a well oiled machine.
Japan had an ever amassing trade surplus with the US and seemed certain to become the world’s leading economy.
The Land of the Rising Sun was seen as an existential threat to America, a menace that threatened America’s cherished identity as No. 1.
The US blamed Japan’s huge trade surplus on sneaky practices like ‘dumping’ and ‘currency manipulation’ that put the natural state of trade relationship in ‘disequilibrium’.
The solution to this sorry state of affairs?
The Plaza Accord.
According to the official story, the US’ James Baker convinced the other members of the G5 to use coordinated currency market intervention and financial cooperation to increase the value of the West German Mark and the Japanese yen.
Or put another way, everybody would work together to decrease the value of the US dollar.
If successful, exports from Japan and West Germany would become more expensive while exports from the US would become cheaper.
The US said it envisioned a 10-15% devaluation of the US currency.
If everything went according to plan, increased sales for US manufacturers would mean the stubborn trade deficit with Japan would vanish and the US would remain the world’s strongest economy.
And ‘fairer’ and more ‘balanced’ international trade would be restored.
President Reagan would look good, Congress could take credit for taking it to the Japanese, and auto workers could stop destroying Toyotas with hammers.
Everybody would be happy.
When I first heard about The Plaza Accord, I found it extremely hard to believe.
Why on earth, for example, would Japan agree to such a thing?!
Imagine you are Noboru Takeshita, Japan’s finance minister who sat across from James Baker that day surrounded by the opulence of the White and Gold Room of the Plaza Hotel.
‘So you want me to shoot Toyota and Sony and the rest of our Japanese exporters in the foot so you can have a low dollar and no trade deficit? Yeah, sounds great! Where do I sign?’
But examine his face in this photo-op at the signing of The Plaza Accord:
Does he look like a man who has just been forced to put an end to Japan’s economic miracle?
Does it seem like Baker got nasty and threatened him with raising tariffs on Japanese goods or pulling out of the US-Japan Security Treaty?
Judging from the smile of Takeshita-san’s face I would guess there was more carrot than stick to the negotiations.
Let it be known that this is the same Noboru Takeshita who later became prime minister only to have to resign over an insider trading scandal.
Behind closed doors, I reckon James Baker told the boys something very different from the official story:
‘Gentleman, on the surface of things Japan and West Germany might think they are getting the short end of the stick with this agreement. Nothing could be further from the truth. Do you know why? The Plaza Accord is going to make us all extremely rich. We are going to tell the press that we foresee the Japanese yen and West German Deutsche Marks rising by 10-15%.
But with the major players in the currency markets seated here today working hand in glove you can expect your currencies to go up a lot more than that. Have you ever experienced what it is like to have a really strong currency?
Just imagine getting twice the value for your money! You like traveling? Well, Hawaii is a lot more fun at half the price. Or maybe you are more into stocks or real estate? I can tell you right now that if you put your money into Japanese stocks you are going to make a killing.
And American blue chip stocks and prime New York real estate are going to be getting a lot more attractive.
Sure your manufacturing sector will take a hit but I am sure you will figure something out with a strong yen or Mark.
Think of the money you can save making your products in Southeast Asia or Eastern Europe!’,
Whatever was going through Noboru Takeshita’s head that day at The Plaza Hotel when he signed the Plaza Accord, he accomplished two main things:
First, he effectively prevented Japan’s economy from overtaking America’s.
Second, he created a huge real estate and stock market bubble the likes of which the world has never known.
Whatever the reasons he chose to go along with the G5 that day, one thing is for sure: He and his friends got very rich.
Noboru Takeshita’s acquiescence makes a lot more sense seen through this lens rather than an nationalistic one asking why he sold out Japan.
And let’s remember Takeshita was taking orders from Japan’s prime minister, Yasuhiro Nakasone who along with President Reagan formed the so-called ‘Ron-Yasu’ friendship:
‘President Reagan is the pitcher and I’m the catcher. When the pitcher gives the signal I’ll cooperate unsparingly, but if he doesn’t sometimes follow the catcher’s signs, the game can’t be won’,
Nakasone, referring to Japan’s trade imbalance with the US:
‘Japan is like a mah-jong player who always wins…Sooner or later the other players will decide that they do not want to play with him’
At this time there was great fear of Japan as Number One (a book by a Harvard professor whose translation sold a half a million copies in Japan making it an all-time best seller by a foreign author).
It was pretty much a foregone conclusion that Japan would overtake the US and become the world’s biggest economy.
The fact that Japan purposely ended its era of selling cheap goods to the world by signing the Plaza Accord suggests that Prime Minister Nakasone preferred Japan playing catcher for the US rather than the other way around.
Whatever the case, a year after signing the Plaza Accord the yen went from 243 yen to 1US dollar to 154 yen to 1US dollar-an almost 40 percent rise!
Japan was rich!
The huge increase in the value of the Japanese yen created an enormous pool of money.
The world’s biggest real estate and stock market bubble soon followed.
First the money flowed into the stock market and then to real estate.
When the Bank of Japan lowered interest rates from 5.5% to 2.5% in 1987 things got really crazy.
Japanese companies went on a shopping spree overseas.
Sony bought Columbia Pictures and Mitsubishi bought half of Rockefeller Center.
Japanese could suddenly afford to take trips overseas.
The ubiquitous Japanese tourist buying three of everything at duty free shops from Hawaii to Hong Kong was born.
Tokyo real estate could sell for as much as US$139,000 per square foot, roughly 350 times the price of Manhattan real estate.
In Ginza yon-chome, Tokyo’s most valuable real estate district, one square meter was rumored to have gone for US$750,000.
At the peak of this real estate frenzy The Imperial Palace in Tokyo, where the Emperor lives, was worth as much as the entire US state of California.
A golf club membership could cost as much as US$ 3 million.
Stocks also went through the stratosphere.
The Nikkei 225 was averaging less than 12,000 points when the Plaza Accord was signed on September 22, 1985 but touched an historical all-time high on December 29, 1989 of 38,957.44.
Adding fuel to the fire, Prime Minister Nakasone and finance minister Takeshita reduced corporate tax rates and lowered income taxes.
When asset prices hit their all-time highs the government tried to control rampant increases in real estate with restrictions on transactions and by requiring buyers to get ward office approval for transactions over 100 square meters. (Housing Japan).
Instead of cooling the market, however, these policies brought rising prices to a grinding halt.
At the beginning of 1991, the world’s biggest real estate and stock market bubble burst with a spectacular thud.
Before it collapsed, however, Japan’s Bubble Era had a five year party that will never be forgotten to those that attended.
Speak to anyone who lived through it and they will tell you it was the time of their life.
Japan’s Bubble was so big that the common quip of the era was that ‘only idiots and foreigners didn’t get rich’.
I am not sure what percentage of the Japanese population would be considered idiots but since only .5% of the population were foreigners it meant pretty much everyone got a piece of the action.
With the Japanese corporate bonus system, all-night company paid parties, rising wages and a strong currency this was an inclusive bubble very much different from today’s quantitative easing fueled real estate and stock market company bubble.
Only the 1% are getting drunk on copious amount of money. Those who own a house have seen big gains in the value of their homes but it is very different from being CASH rich.
With Japan’s Bubble even an idiot foreigner like myself got rich.
And I didn’t arrive until November 1993, nearly three years after The Bubble.
In April 1995 while I was still in Japan, the yen hit 79 yen to the dollar an all-time high to this day.
Three times! its Plaza Accord value.
But not everybody was so fortunate in the wake of The Bubble’s collapse.
There are stories of Mitsubishi engineers who had bought condos at the height of the market and ended up living in cardboard boxes at the station because they had lost their jobs and their apartments were so far underwater there was no hope of ever repaying their loans.
People from that generation will tell you with a sad look that things will never be that good again.
In fact, since The Bubble burst Japan has been mired in anemic growth and deflation. The talk of Japan as No. 1 ended at exactly the same time as The Bubble.
It has been one big, long The Lost Decade ever since.
The funny thing about the Plaza Accord? Its stated aim of eliminating the trade imbalance between the US and Japan hasn’t been accomplished to this very day.
And Japanese export corporations who were the target of the Plaza Accord? Last time I checked Toyota was doing okay.
Japanese workers, however, have been paying the price for The Bubble ever since. Wages are mostly still at 1985 levels. People save money by waiting until next year to buy a new car or fridge when prices will have fallen.
That’s called deflation. It’s hard to imagine if you haven’t lived through it.
At home, the only way Japanese companies can increase profits is by cutting costs. Stagnant wages means demand is flat in Japan. Hence, the ever-increasing expansion abroad.
The World’s Biggest Bubble is something I experienced first hand.
It was the most intoxicating experience of my life. But like Japan itself I was left with a very bad hangover.
I wonder, what kind of future Japan would have had if Noboru Takeshita had refused to sign the Plaza Accord that day?