How Rigid Labor Markets Shaped Japan’s Response to the Plaza Accord
Kumanomido: "Exchange Rate Appreciation and Structural Adjustment: Evidence from the Plaza Accord" CRC Discussion Paper No. 567
The 1985 Plaza Accord represents a pivotal moment in international economics, yet its long-term effects on the internal structure of an advanced economy like Japan have remained under-explored. In a recent study, Hiroshi Kumanomido (LMU Munich, Project B04) utilizes firm-level and regional data from 1980 to 1999 to trace how this sharp yen appreciation (which exceeded 50% against the dollar) reshaped the nation’s industrial landscape. The analysis reveals a complex pattern of adjustment where traditional metrics of success like sales and productivity diverged sharply from employment outcomes.
At the firm level, industries with high export exposure to the United States experienced a significant 8.4% decline in sales and a 4.5% drop in labor productivity. However, domestic employment in these firms fell by only 3.8%. This relative stability in the workforce suggests that Japan’s rigid labor institutions and firm-specific training investments prevented the mass layoffs often seen in more flexible labor markets. Larger firms, in particular, maintained their headcount while absorbing the shock through reduced output, leading to pronounced declines in productivity.
The research highlights outward foreign direct investment (FDI) as a primary channel for this structural transformation. Following the Accord, export-exposed industries significantly increased their investment in Asia. Firms with higher FDI potential adjusted to the appreciation not by cutting domestic staff, but by relocating production margins abroad. While this strategy helped preserve headquarters employment to support overseas operations, it further depressed domestic sales and measured productivity. This indicates that FDI functioned more as a gradual reallocation of activity across borders than as an immediate escape from the appreciation shock.
Regional data further clarifies these shifts. Cities heavily reliant on U.S.-bound exports saw a 3.1 percentage point decline in their manufacturing employment shares, coupled with a 7.8 percentage point increase in service sector employment. This divergence suggests that structural change was largely driven by the extensive margin, including firm exits and sectoral reallocation. Interestingly, cities with higher FDI potential experienced less severe manufacturing job losses, confirming that the ability to coordinate cross-border production mitigated local deindustrialization. Ultimately, the evidence indicates that the Plaza Accord acted as a catalyst for Japan’s long-term transition toward a service-oriented economy through a persistent process of structural adjustment.
Link (pdf): Exchange Rate Appreciation and Structural Adjustment: Evidence from the Plaza Accord