The Cause and Effects of Japan’s Economic Bubble Collapse and the Plaza Accord

Introduction

The collapse of Japan’s economic bubble in the early 1990s was one of the most significant financial crises in modern history. It stemmed from a combination of excessive speculation, loose monetary policy, and structural inefficiencies in the economy.

At the heart of this crisis was the Plaza Accord of 1985, which played a crucial role in the appreciation of the Japanese yen, triggering shifts in monetary policy that fueled an unsustainable asset bubble. This article explores the causes and effects of Japan’s economic bubble collapse and how the Plaza Accord contributed to this phenomenon.

I. The Plaza Accord and Its Role in Japan’s Economic Bubble

1. What Was the Plaza Accord?
The Plaza Accord was an agreement signed on September 22, 1985, at the Plaza Hotel in New York by five major economies: the United States, Japan, West Germany, France, and the United Kingdom. The goal was to depreciate the US dollar relative to other major currencies, particularly the Japanese yen and the German Deutsche Mark.

The main reasons for the agreement were:
US Trade Deficit: The US had a growing trade deficit, particularly with Japan, as…