Is History Repeating Itself ? From Japan’s Lost Decades to India’s Trade War
In 1985, a single agreement signed at a New York hotel changed the course of the global economy forever. The Plaza Accord was a deal designed to save the American economy, but it arguably cost Japan its future. Today, as trade tensions rise between the US, India, and China, are we witnessing the beginning of a sequel?
The History: What Was the Plaza Accord (1985)?
In the early 1980s, the United States faced a crisis. The US Dollar (USD) was too strong, making American goods expensive abroad, while Japan was the world's dominating exporter. The US ran a massive trade deficit, specifically with Japan.
On September 22, 1985, the G5 nations (US, Japan, West Germany, France, UK) met at the Plaza Hotel. They agreed to intervene in currency markets to depreciate the US Dollar and strengthen the Japanese Yen.
The Aftermath for Japan:
Currency Shock: The Yen strengthened from ~250 JPY/USD to ~150 JPY/USD in just one year.
Export Collapse: Japan’s exports became too expensive for the world to buy.
The Bubble: To save the economy, Japan slashed interest rates, leading to a massive real estate and stock market bubble.
The Crash: When the bubble burst in the early 90s, Japan entered the "Lost Decades"—a recessionary stagnation that lasted 25 years.
Japanese markets remained in a bear market from 1990 to 2011. It wasn't until Prime Minister Shinzo Abe initiated his aggressive "Abenomics" policies (2012–2020) that the economy began to recover. Tragically, Abe was assassinated in 2022, marking a grim end to an era of recovery efforts.
The Present: A "Plaza Accord" for India & China?
Fast forward to today. The US again faces a massive trade deficit, but this time the targets are China and India. The strategies being deployed—tariffs, currency monitoring, and trade pressure—resemble a modern form of "financial warfare."
If the US forces a deal that artificially strengthens the Indian Rupee (INR) to fix its own trade deficit, the consequences for India could be severe.
Economic Analysis: The Danger of Rupee Fluctuation
What happens to the Indian economy if we sign a trade deal that manipulates our currency?
1. The "Plaza Scenario": Forced Appreciation of the Rupee
If a deal forces the Rupee to become stronger (e.g., moving from ₹85 to ₹60 against the USD):
Export Death: Indian goods (IT services, Textiles, Pharma) would become expensive for foreign buyers. Like Japan in 1986, our export sectors could collapse.
Job Losses: Millions of jobs in export-heavy sectors (like Bangalore's IT hubs or Tiruppur's textile mills) would be at risk.
Import Surge: Foreign goods would become cheap, flooding the Indian market and hurting domestic manufacturers ("Make in India").
2. The Current Reality: Depreciation of the Rupee
Currently, the market is pushing the Rupee weaker (depreciation). While often seen as bad, this actually acts as a "shock absorber":
Competitiveness: A weaker Rupee makes Indian exports cheaper and more attractive globally, countering the effect of US tariffs.
IT & Pharma Boom: These sectors earn in Dollars; a weaker Rupee boosts their revenue in INR terms.
The Downside: It makes imports (Oil, Electronics) expensive, which can drive up inflation in India.
Conclusion
The Plaza Accord taught us that bowing to external pressure to manipulate currency can destroy an economy for generations. As India navigates this "financial warfare," the goal must be stability. Accepting a deal that mimics the 1985 accord could push India into its own "Lost Decades," just as it did to Japan. The government must balance trade relations without sacrificing the competitiveness that drives our growth.
