The Japanese balance of payments from 1987 to 1993 is as follows. All numbers are reported in billions of U.S. dollars. The last line gives the real effective exchange rate index of the yen relative
to other currencies. An increase in the index means a real appreciation of the yen.
a. Calculate the trade balance, current account, capital and financial account, and official reserve account for each year.
b. Use these numbers to describe what has happened in terms of Japanese financial transactions with the rest of the world.

Question

The Japanese balance of payments from 1987 to 1993 is as follows. All numbers are reported in billions of U.S. dollars. The last line gives the real effective exchange rate index of the yen relative
to other currencies. An increase in the index means a real appreciation of the yen.
  a. Calculate the trade balance, current account, capital and financial account, and official reserve account for each year.
b. Use these numbers to describe what has happened in terms of Japanese financial transactions with the rest of the world.

Quizplus · Accepted Answer

The Answer is a. The various accounts are given below:

\begin{array} { l r r r r r r r } & 1987 & 1983 & 1989 & 1990 & 1991 & 1992 & 1993 \\hline ext { Trade Balance } & 96 & 95 & 77 & 63 & 104 & 133 & 141 \ ext { Current Accaunt } & 87 & 79 & 57 & 35 & 75 & 118 & 131 \ ext { Capital and Financial } & - 49 & - 64 & - 7 & - 41 & - 80 & - 117 & - 104 \ ext { Accaunt } & & & & & & & \ ext { Official Reserves } & - 38 & - 15 & 13 & 6 & 5 & - 1 & - 27\end{array}

b. The Japanese trade balance, which has been constantly positive over the time period, worsened from 1987 to 1990 and improved from then on. The current account tracked the trade balance. This surplus was mostly used to invest abroad (negative capital and financial account).
The decrease in the current account from 1988 to 1990 led to a drop in official reserves (positive reserve account) and a weakening of the yen. Its real effective exchange rate depreciated from 135 to 114. This improvement in the terms of trade led to an increase of the Japanese trade balance in the early 1990s. In 1991 and 1992, the increased current account surplus was used to
increase foreign investments by the Japanese (the capital and financial account deficit increased from 41 billion in 1990 to 117 billion in 1992). In 1993, the current account increased to 131 billion but net foreign investments accounted to only 104 billion. Hence, Japanese reserves increased by 27 billion (a negative official reserve account). This led to a strong appreciation of the yen.

The Japanese Balance of Payments from 1987 to 1993 Is