Exchange Rates and the Current Account Balance: A Case Study of the Yen

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Abstract/Contents

Abstract: Whenever there exists persistent current account imbalances between countries, the surplus country is often accused of undervaluing its exchange rate to give its exports an unfair advantage, and is thus pressured into letting its exchange rate appreciate. A forensic exploration of the embittered trade history between the United States and Japan is undertaken to refute these claims. This paper seeks to demonstrate that such an accusation is faulty. Firstly, such an accusation does not specify by which measure an exchange rate is undervalued. Secondly, even if an exchange rate is undervalued by a specified measure, it does not follow automatically that an undervalued exchange rate is a deliberate mercantilist policy that gives exports an unfair advantage. Thirdly, even if the exchange rate were allowed to appreciate, there is no evidence to suggest that the current account balance would be restored; a corollary to this is that any restoration of competitive balance need not be accompanied by a change in the exchange rates. Finally, the constant bashing of the surplus country introduces volatility into the system and leads could lead a ‘one-way bet’ on the exchange rate that makes it harder, rather easier, to achieve current account balance. In light of this, the United States should have worked together with Japan in the 1980s and 1990s to stabilize the yen-dollar exchange rate.

Type of resource	text
Date created	May 2010

Author	Tan, Jireh
Primary advisor	McKinnon, Ronald
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Subject	current account
Subject	trade
Subject	United States
Subject	Japan
Subject	exchange rate valuation
Genre	Thesis

Location	https://purl.stanford.edu/cz733gv5774

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Preferred Citation: Tan, Jireh. (2010). Exchange Rates and the Current Account Balance: A Case Study of the Yen. Stanford Digital Repository. Available at: https://purl.stanford.edu/cz733gv5774

Stanford University, Department of Economics, Honors Theses

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