WEEKEND READ: How America Crushed Japan in 1985, and Why China Refuses to Repeat the Mistake

Apr 26, 2026 - 21:00

EBM Weekend Read

London, 26 April 2026 — In the late 1980s, Sony dominated consumer electronics. Toyota and Honda were eating Detroit’s lunch. Mitsubishi had just bought the Rockefeller Center in New York. Japanese GDP had compounded for three decades at rates that put America on edge. By 1985, Japan represented roughly 15% of global GDP and was the world’s largest creditor nation. American politicians — including a young Manhattan property developer named Donald Trump, who took out full-page newspaper advertisements in 1987 demanding Japan “pay” for trade imbalances — were openly furious that Japan was running enormous surpluses with the United States while refusing to buy American goods. Reagan’s administration, under pressure from a manufacturing lobby led by Caterpillar, IBM, and Motorola, decided to act.

What happened next is the most important under-studied chapter in modern trade history. It is also the playbook that Beijing has spent forty years studying — and explicitly refusing to repeat. To understand why the current US-China trade dispute keeps escalating without resolution, you have to start with what the United States did to Japan in September 1985.

The Setup — How Japan Got Too Big

Japan’s post-war economic miracle was no accident. After 1945, the United States deliberately flooded Japan with industrial technology, patents, and capital — a calculated bet that a rebuilt, prosperous Japan would serve as a strategic anchor against communism in East Asia. Japanese industry took the inputs, and over the next three decades did something the Americans had not anticipated. They didn’t just copy. They refined, improved, and out-engineered.

By the mid-1980s, the result was visible in every American household. Sony Walkmans had killed off entire categories of US consumer electronics. JVC and Sony VHS players had displaced American manufacturers. Honda Civics and Toyota Corollas were threatening Detroit’s most profitable segment. Japanese semiconductors were beginning to threaten American chip dominance — the precursor to today’s global semiconductor competition.

Between 1980 and 1985, the US dollar appreciated by roughly 50% against the Japanese yen, the German mark, the French franc, and the British pound. The strong dollar made American exports prohibitively expensive while making Japanese imports cheap, supercharging Japan’s trade surplus and widening the US trade deficit to $112 billion by 1984 — a record at the time. Reagan’s first administration treated currency intervention as anathema. By the second administration, the politics had shifted. Newly-installed Treasury Secretary James Baker, with deputies Richard Darman and David Mulford, decided that “item one on our agenda was the dollar.”

The Plaza Accord — September 22, 1985

On a Sunday afternoon at the Plaza Hotel in New York, the finance ministers and central bank governors of the United States, Japan, West Germany, France, and the United Kingdom signed an agreement that would reshape the global economy. The deal was straightforward: the five nations would jointly intervene in currency markets to weaken the US dollar against the other four currencies — primarily the yen and Deutsche mark.

The intervention worked. Faster than anyone expected.

In September 1985, the yen traded at ¥240 per dollar. By 1986, it was ¥153. By 1988, ¥120 per dollar. The yen had appreciated nearly 50% against the dollar in 36 months. This was a deliberate, coordinated, sovereign-policy-driven currency revaluation of unprecedented scale. Japan participated voluntarily — Finance Minister Takeshita had been involved in planning the Plaza meeting with Baker for months beforehand — but the immediate consequences for Japanese export industries were severe.

Toyota’s profitability collapsed in dollar terms. Sony’s American revenues, translated back into yen, shrank materially. Japanese steel and electronics manufacturers found themselves suddenly priced out of US markets. The Bank of Japan, faced with a domestic recession triggered by the strong yen and collapsing exports, responded with aggressive monetary easing — slashing interest rates and flooding the financial system with cheap credit.

That liquidity didn’t go where the Bank of Japan hoped.

The Bubble — and the Burst

Cheap credit, an over-strong yen, and Japanese corporate confidence flush with decades of growth combined to produce one of the most spectacular asset bubbles in modern economic history. Between 1985 and the end of 1989, the Nikkei stock index rose from roughly 13,000 to a peak of 38,915. Japanese real estate prices — particularly in Tokyo — reached levels at which the grounds of the Imperial Palace were notionally worth more than the entire state of California. Japanese corporations, awash with paper wealth, embarked on a spending spree that became the global financial spectacle of the late 1980s. Mitsubishi bought Rockefeller Center. Sony bought Columbia Pictures. Matsushita bought Universal Studios.

Then the bubble burst. The Nikkei peaked at the end of 1989. By 1992 it had lost more than half its value. Japanese real estate prices began a decline that, in many sectors, would not bottom out for two decades. Banks were left holding catastrophic levels of bad debt. The Bank of Japan and the Ministry of Finance — terrified of forcing a wave of corporate bankruptcies that would compound the financial damage — chose instead to keep insolvent companies on life support through cheap credit and regulatory forbearance.

The result was the era of the “zombie companies” — businesses that should have failed but didn’t, kept alive by cheap government-backed lending. Capital was misallocated to the walking dead rather than freed to fund new innovation. Japanese R&D continued, but corporate dynamism collapsed. The decade that followed — the “Lost Decade” of the 1990s — turned into two lost decades. Then three.

The numbers that demonstrate the lasting damage are stark. In 1985, Japan’s GDP was $1.43 trillion versus America’s $4.23 trillion — a ratio of roughly 1:3. By 2025, the US economy was approaching $30 trillion. Japan’s was around $4 trillion — a ratio of 1:7.5. America has roughly tripled in scale since 1985. Japan has roughly tripled… over a much longer period, with virtually no growth across multiple decades.

While Japan stagnated, the world moved on. Apple, Microsoft, Google, Amazon and a generation of American tech giants rose. Samsung, TSMC and a generation of Korean and Taiwanese champions rose. China rose. Sony continued to make television sets while the future was being built around it.

The Lesson China Refused to Forget

Beijing has spent four decades studying the Plaza Accord. The lesson Chinese policy-makers drew is the opposite of the one Tokyo learned. Where Japan voluntarily participated in coordinated currency revaluation in 1985 to maintain the political alliance with Washington, China has refused, repeatedly and at every escalation, to allow the renminbi to be revalued by external pressure.

The architecture of Chinese currency policy is built precisely to prevent a Plaza-style revaluation. The renminbi is not freely floating. The People’s Bank of China sets a daily reference rate against the dollar and allows trading only within a tightly managed band. Capital controls prevent the kind of speculative inflows that overwhelmed Japanese policy-makers in the late 1980s. When the United States has demanded renminbi revaluation — under successive administrations from George W. Bush through Trump’s first term and now into Trump’s second — Beijing has appreciated the currency only on its own timetable, in carefully managed increments, and never in response to external coordination.

This is not stubbornness. It is policy. Beijing learned from Tokyo’s mistake, and the lesson is that surrendering monetary sovereignty to a coordinated G-7-style accord is, for an export-led economy in strategic competition with the United States, a form of slow economic suicide.

The current US-China trade dispute is shaped fundamentally by this asymmetry. American Treasury secretaries can demand currency adjustments and impose tariffs, but they cannot — as Baker did at the Plaza in 1985 — get the Chinese finance minister into a hotel room and walk out with a signed agreement to weaken the dollar. The unilateral leverage that the United States held in 1985 over an aligned G-5 partner does not exist in 2026 vis-à-vis a strategic adversary that has spent forty years building immunity to the exact playbook.

The European Read

For European business leaders, the Plaza Accord and Japan’s experience offer two specific contemporary lessons. First, monetary policy autonomy matters more than allies want to admit. Japan’s loss of currency sovereignty in 1985 — taken voluntarily, in the spirit of cooperation — produced consequences that have outlived three Japanese generations. European policy-makers debating ECB independence, euro reform, and the EU’s relationship with US monetary policy should study the Plaza period closely.

Second, the bubble dynamics that emerge when central banks ease monetary policy in response to external currency shocks are predictable and dangerous. Japan’s late-1980s asset bubble was not an accident. It was the direct consequence of the BoJ trying to compensate for export pain with cheap money. European central bankers responding to current dollar volatility, tariff shocks from Washington, and the Iran war energy spike face the same temptation, and the same risks.

History does not repeat. It rhymes.

The question for European business in 2026 is not whether American economic policy will continue to use the dollar as a strategic instrument. It will. The question is whether Europe — and European companies — will respond like Japan did in 1985, or like China has since.

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