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Japan's Imbalance of Payments

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  • Nikolas Müller-Plantenberg

Abstract

During the past three decades, Japan’s current account experienced five large swings. The yen appreciated considerably in periods when the current account boomed, and it depreciated whenever Japan’s external performance weakened. However, there has always been a certain lag in the adjustment of the exchange rate. This paper tries to explain these empirical regularities. It argues that as a result of the large movements of the current account, the flows of cash between Japan and ist trading partners fluctuated considerably, which in turn influenced the demand for yen relative to other currencies. To the extent that these cash flows were lagging the current account—primarily because of the Japanese lending abroad—the exchange rate’s response to external imbalances occurred with a delay. Based on the estimated maturity structure of Japan’s foreign lending, the paper constructs a measure of payment flows across Japanese borders, which is shown to follow the movements of the exchange rate very closely. The empirical findings raise doubts regarding the feasibility of proposals to depreciate the yen in order to help Japan out of its current economic crisis.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1089.

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Date of creation: 2003
Date of revision:
Handle: RePEc:ces:ceswps:_1089

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Keywords: yen exchange rate; cash flow; current account; foreign lending maturity structure;

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References

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  1. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 9-57, January.
  2. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
  3. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  4. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers.
  5. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
  6. Robin Brooks & Hali Edison & Manmohan S. Kumar & Torsten Sløk, 2004. "Exchange Rates and Capital Flows," European Financial Management, European Financial Management Association, vol. 10(3), pages 511-533.
  7. Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  10. Kenen,Peter B., 2000. "The International Economy," Cambridge Books, Cambridge University Press, number 9780521644358, October.
  11. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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Cited by:
  1. Müller-Plantenberg, Nikolas, 2012. "Boom-and-bust cycles marked by capital inflows, current account deterioration and a rise and fall of the real exchange rate," Working Papers in Economic Theory 2012/10, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  2. Müller-Plantenberg, Nikolas, 2012. "Long swings in Japan’s current account and in the yen," Working Papers in Economic Theory 2012/08, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  3. Müller-Plantenberg, Nikolas, 2012. "Balance of payments flows and exchange rate prediction in Japan," Working Papers in Economic Theory 2012/09, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).

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