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International Banking - the Japanese economy.

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Introduction

Faculty of Business and Law Assignment Authentication Declaration Unit Code : MPE 707 Course Name : International Banking Campus : Toorak Unit Coordinator : Vijay Mohan Assignment No. : 1 Due Date : 26th April, 2004 Name Student Number Barry Ackers 400088489 Chen Zhe 300488444 Andy Susanto Hendrawan 2000491433 Haibin Jiang 300300517 "We hereby declare that the material submitted in this assignment is our own work except where specifically acknowledged and referenced." Date: 26th April 2004 Table of Contents 1 Introduction.................................................................. 3 2 Background................................................................... 3 3 Balance of Payments......................................................3 3.1 Current Account...........................................................4 3.2 Capital and Financial Account.......................................9 4 Foreign Exchange.......................................................... 14 5 Conclusion.....................................................................16 6 Bibliography & References.............................................17 1. Introduction Over the past few years the Japanese economy has been under careful scrutiny with eminent economists lamenting a decade of economic stagflation in Japan. More recently, indications are that the Japanese economy is beginning to emerge from this economic quagmire. 2. Background With a GDP of US$3,450 billion, Japan is the third largest economy in the world after the US and China. Industry, the most important sector of the Japanese economy, is heavily dependent on imported raw materials and fuels. After three decades of spectacular overall real economic growth, Japan's growth slowed markedly, becoming into a recession. Government's efforts to revive economic growth were further hampered in 2000/01 by the slowing of the US and Asian economies. [PhrasebaseTM] Japan is the world's largest and technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. ...read more.

Middle

Reviewing the Financial Account, this correlates with a reduction from US$123 billion to US$63 in 1996. Figure 5 above shows steadily increasing transfers without any corresponding economic value being received in return (i.e. aid). Since there is no corresponding economic value, both legs of the transaction appear in the same account. As a result, the debits approximately mirrors the credits, after allowing for timing differences. 3.2 Capital and Financial Account The Capital and Financial Account records the net effect of all financial transactions between residents and non-residents. Unlike the Current Account, where transactions are aggregated as either imports or exports, in the Capital and Financial Account the financial inflows and outflows are offset against each other with only the net effect being shown. The Capital and Financial Account reflects how the transactions on the Current Account were financed, in net terms. [Mahoney et al] Exports comprise debits on the Capital and Financial Account, due to either an increase in foreign exchange financial assets or a decrease in foreign liabilities, whereas imports represent credits. As depicted in Figure 6 hereunder, the combined Japanese Capital and Financial Account increased significantly during the period under review, reflecting the strength of Japan's export orientation and resultant Current Account Surplus. In 1996, the rate of growth in the Financial and Capital Account slowed to half of the previous year, fuelled by a reduction of 40% in the Current Account surplus. ...read more.

Conclusion

The depreciation was fuelled by the revelation that the US government may favour a policy of allowing the Yen to be depreciated. The US view is that given its relative size and importance, the Japanese economy should be allowed to recover, and weakening the Yen could be one way of stimulating Japan's recovery. As a result of a depreciating Yen, investment should increase with a weak Yen making Japanese goods and services more competitive (i.e. cheaper), thereby increasing the demand for the supply of Japanese goods and services, stimulating Japanese exports. On the other hand when evaluating the comparative strength and size of the Japanese economy, the weak currency tends to distort the position. 5 Conclusion The foregoing analysis is based on the principle of ceteris paribus. The analysis is accordingly constrained by the impact of other factors that have not been taken into account and/or the compounded effect of several minor variations. Moreover, the BOP is merely one of the tools used to evaluate the economic health of a country; other factors include GDP, inflation, interest, etc. Whilst the BOP is overwhelmingly positive, appearing to be stable, with the prospects of recovering economic indicators, the fundamental problem that has to be overcome relates to reversing Japan's deflationary position, following the stock market crash of 1989. This requires a fundamental restructuring of Japan's economic and monetary policies. It is expected that bouyant export growth would continue to be the cornerstone of Japan's economic recovery, driven by strong demand from China. ...read more.

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