Global Affairs Session 25 29 April 2026

FROM PLAZA 1985 TO IRAN 2026

How the World Changed

The Plaza Accord did not cause the Iran war, but it helped shape the dollar-centred financial system, Asia’s manufacturing and energy-demand structure, and the globalised economy through which a regional conflict now transmits worldwide economic and geopolitical consequences.

Dollar preeminence Connecting Plaza to Iran Plaza Accord recap Consequences Impact on China Impact on Russia From Plaza to Iran 2026

The earned preeminence of the dollar

The session begins with the idea that the United States dollar’s position as the world’s leading reserve currency rests on confidence in American economic stability and the depth of its financial markets. This privileged position provides the United States with exceptional global financial influence, but it is not presented as an automatic or permanent entitlement.

Connecting the previous discussion to Iran 2026

The previous session examined how the Plaza Accord changed Japan and how the United States used international monetary coordination to advance its economic interests. This session carries that discussion forward by linking the financial and geopolitical changes that followed Plaza 1985 to the global consequences of the Iran war in 2026.

A quick recap of the Plaza Accord

• Date: The Plaza Accord was signed on 22 September 1985.
• Venue: The agreement was reached at the Plaza Hotel in New York City.
• Participants: Finance ministers and central-bank governors from the G5 countries—the United States, Japan, West Germany, France and the United Kingdom—took part.
• Objective: The governments coordinated action to depreciate the United States dollar against other major currencies.
• Immediate significance: The agreement had far-reaching implications for the world economy, beginning with Japan, which moved towards monetary easing soon afterwards.

Consequences of the Plaza Accord

The Plaza Accord did not merely change exchange rates. It reshaped the global economy, contributed to Japan’s largest boom-and-bust cycle, and accelerated the movement of manufacturing across Asia.

• Rapid appreciation of the Japanese yen: The yen strengthened sharply from around ¥240 per dollar to nearly ¥120 per dollar within a few years, making Japanese exports more expensive internationally.
• Damage to export competitiveness: Japanese companies, especially in automobiles and electronics, faced a declining price advantage.
• Slower export-driven growth: Firms responded by relocating manufacturing to lower-cost destinations, including Southeast Asia and the United States.
• Expansionary monetary policy: To counter the export slowdown, the Bank of Japan reduced interest rates.
• Cheap credit: Easy money flooded the economy and became one of the most direct links to the developments that followed.
• Late-1980s asset-price bubble: Real-estate and stock prices surged, the Nikkei 225 reached record highs, and Tokyo land prices rose to extraordinary levels.
• Burst of the bubble and the “Lost Decade”: The bubble collapsed in the early 1990s, followed by a banking crisis, deflation and prolonged stagnation that lasted longer than a single decade.
• Rise of manufacturing elsewhere in Asia: South Korea, Taiwan and later China benefited as Japanese production moved abroad.
• Accelerated Asian industrialisation: The relocation of production strengthened supply chains centred in Asia.
• Partial and temporary reduction in the United States trade deficit: A weaker dollar helped make American exports more competitive.

Impact of the Plaza Accord on China

• Manufacturing shifted from Japan to China: Yen appreciation made Japanese exports costlier, encouraging Japanese firms to move production to lower-cost countries. China became a major destination during the late 1980s and 1990s.
• Foreign direct investment increased: Japanese and later Western companies invested in China to retain competitiveness, bringing capital, technology transfer and managerial expertise.
• An export-led growth model gained strength: China observed Japan’s experience with rapid currency appreciation and maintained a relatively undervalued yuan to support exports and trade surpluses.
• China integrated deeply into global supply chains: As production moved from higher-cost economies, China established itself as a central assembly and manufacturing hub, especially after joining the World Trade Organization in 2001.
• Large foreign-exchange reserves accumulated: Export success created vast dollar-denominated reserves, providing financial leverage and stability while also tying China closely to global monetary conditions.

Plaza’s impact on Russia

The presentation draws a sharp distinction between China’s development and the Soviet or Russian experience: the Plaza Accord had only a weak direct connection with the Soviet Union and does not explain Russia’s later economic trajectory.

• Weak direct connection: The Soviet Union was not integrated into global financial markets in 1985, so the G5 currency realignment did not directly harm it.
• Oil-price decline had other causes: Falling oil prices damaged Soviet revenues, but supply conditions, OPEC decisions and increased Saudi production were more important than the Plaza Accord.
• The Soviet collapse had internal causes: Structural inefficiencies, failures of central planning and political reforms under Mikhail Gorbachev were the main drivers; external currency changes played, at most, a background role.
• No manufacturing-relocation benefit: Unlike China and Southeast Asia, the Soviet Union’s closed system prevented it from gaining from Japan’s outward investment. Russia’s post-1991 path was instead shaped by privatisation, institutional collapse and policy shocks.
• Commodity dependence was structural: Russia’s reliance on oil and gas existed before 1985 and continued afterwards; it was not created by Plaza.
• Modern effects are negligible: Contemporary Russia is influenced much more by sanctions, energy markets and geopolitics.

From Plaza 1985 to Iran 2026

The Plaza Accord did not “cause” the Iran war. It did, however, help shape the United States-led financial system, the Asia-centred structure of energy demand and the globalised economy. These conditions make a conflict involving Iran more globally significant, more economically disruptive and more entangled with great-power politics.

• Dollar dominance strengthened United States leverage: The dollar-centred system gave Washington outsized power over sanctions, trade and finance. That leverage is central to United States pressure on Iran through measures such as sanctions and blockades.
• Japan’s stagnation contributed to a United States-centric order: Japan’s long slowdown coincided with the rise of a unipolar international system led by the United States.
• Manufacturing moved to Asia and oil demand followed: Asia became the largest oil-consuming region, and the presentation states that roughly 75 per cent of Gulf oil exports now go to Asia. Middle Eastern stability—and therefore conflict involving Iran—became globally critical.
• Financial globalisation accelerated crisis transmission: War-related shocks now spread rapidly through currencies, bonds and oil prices, turning the Iran war into a global macroeconomic event rather than a purely regional conflict.
• A strong financial system supports prolonged conflict: The scale of the United States financial system enables large military expenditure and sustained intervention.
• Energy markets became financialised: Oil came to be traded extensively through futures and derivatives. Energy shocks can therefore create wider financial disruption and inflationary waves.
• Structural imbalances sustain geopolitical tension: Persistent United States deficits, Asian surpluses and continuing dependence on Middle Eastern energy indirectly reinforce geopolitical flashpoints such as Iran.

Value addition

Glossary and related terms

Plaza Accord

A 1985 agreement among the G5 economies to coordinate policies that would reduce the value of the United States dollar against other major currencies.

G5

The group consisting, in this context, of the United States, Japan, West Germany, France and the United Kingdom.

Currency depreciation

A fall in the value of one currency relative to another, making that country’s exports cheaper abroad and imports more expensive at home.

Currency appreciation

A rise in a currency’s external value, which can reduce the price competitiveness of exports.

Expansionary monetary policy

Interest-rate reductions or other measures intended to increase credit, spending and economic activity.

Asset-price bubble

A rapid rise in the prices of assets such as shares or property beyond levels supported by underlying economic conditions.

Lost Decade

The prolonged period of weak growth, banking stress and deflation that followed the collapse of Japan’s asset bubble.

Foreign direct investment

Investment by a company or investor from one country in productive assets or business operations in another country.

Export-led growth

A development model that relies heavily on producing goods and services for international markets.

Foreign-exchange reserves

External currencies and related assets held by a central bank to support payments, stability and financial confidence.

Dollar dominance

The central role of the United States dollar in reserves, trade, borrowing, payments and international finance.

Financial globalisation

The growing integration of national financial systems through cross-border capital, currencies, credit and markets.

Energy-market financialisation

The increasing role of futures, derivatives and financial investors in the pricing and trading of energy commodities.

Structural imbalance

A persistent mismatch, such as one economy running large deficits while another accumulates large surpluses.

Value addition

Conceptual references

• The Plaza Accord as an example of coordinated international exchange-rate intervention.
• Japan’s monetary easing, asset-price bubble and prolonged post-bubble stagnation.
• The relocation of manufacturing and investment towards China and other Asian economies.
• The limited direct connection between the Plaza Accord and the Soviet Union or post-1991 Russia.
• The role of dollar-based finance, sanctions, energy demand and global markets in transmitting the consequences of conflict involving Iran.