The yen-dollar relationship: a recent historical perspective

This paper explores the interaction between exchange rate alignment and external balance for Japan and the United States. The analysis highlights the influence of current account developments on the yen-dollar exchange rate, as well as the reverse, and the interaction between the capital account and the exchange rate. We first sketch the broad outlines of the factors driving medium-run swings in the yen-dollar exchange rate over the floating rate period. After a brief consideration of the implications of financial liberalization for the yen-dollar exchange rate, the paper takes a more detailed look at the secular developments underlying movements in the yen-dollar relationship, tracing the evolution over the past two-and-a-half decades of some of the more salient structural features of the American and Japanese economies. Developments in each economy related to productivity, the composition and regional pattern of trade, real wages, the terms of trade and the savings-investment balance provide insights into the longer-run trends of the Japanese current account and associated pressures for yen appreciation over time. Finally, we weigh the relative contributions of changes in the exchange value of the yen and other economic factors in fostering more balanced trade between Japan and its major trading partners, including the United States. Evidence from the Multi-Country Model indicates that a 35 percent appreciation of the yen against the dollar over time will reduce Japan's surplus with the United States by $20 billion.Foreign exchange rates ; International economic relations ; Japan