this paper was published in National Saving and Economic Performance, D. Bernheim and J. Shoven, eds., University of Chicago Press: Chicago, for the National Bureau of Economic Research, 1991. (A more complete version appeared as NBER Working Paper No. 2856.) A somewhat revised version is to be reprinted in Current Issues in International Trade and International Finance, edited by Dilip Das, Oxford University Press, Oxford, UK. The present version was further revised and is to appear as a chapter in On Exchange Rates, a collection of the author's writings, forthcoming from M.I.T. Press

The paper surveys the extensive literature on whether Japanese corporations in the 1980s were able to finance investment more easily than Americans. Along the way, it considers: the leverage of Japanese firms, dividend payout, equity price/earnings ratios, corporate taxation, crossownership, speculative bubbles, international capital mobility, the lower cost of financing investment internally and through "main bank" relationships, and the move to a more market-oriented system as these relationships appeared to break down in the 1980s. The conclusion that emerges from the literature is that the cost of finance in the 1980s was indeed lower in Japan than in the United States, by a variety of measures. But trends of domestic and international liberalization, followed by the events of 1990-92, have now raised the cost of capital in Japan to the U.S. market level. Some unanswered questions remain, regarding the reported shifts in reliance by firms between banking relationships versus securities markets.

heir saving by investing in the emerging market than they could domestically. Third, everyone benefits from the opportunity to diversify away risks and smooth disturbances. Fourth, letting foreign financial institutions into the country improves the efficiency of domestic financial markets. Over-regulated and potentially inefficient domestic institutions are subject to the harsh discipline of competition and the demonstration effect of having examples to emulate. At the same time, the governments face the discipline of the international capital markets in the event they make policy mistakes (e.g., in their domestic regulatory duties). There are some indications, however, that financial markets do not always work quite as perfectly as the happy view of the economic theorist suggests. Most salient are such recurrent disruptions as the 1982 international debt crisis, 1992-93 crisis in the European Exchange Rate Mechanism, 1994-95 Mexican peso crisis, and 1997-98 Asian financial crisis

Mossavar-Rahmani Center for Business and Government for support and to thank a number of officials in the Clinton and (current) Bush Treasury Departments, at all levels, for discussion regarding the biannual reports to Congress. Neither they, nor any institutions with which the authors are associated, bear any responsibility for any views expressed in this paper, which are those of the authors alone. The IMF Articles of Agreement forbid a country from manipulating its currency for unfair advantage. The US Treasury has been legally required since 1988 to report to Congress biannually regarding whether individual trading partners are guilty of manipulation. One part of this paper tests econometrically two competing sets of hypothesized determinants of the Treasury decisions: (1) legitimate economic variables consistent with the IMF definition of manipulation – the partners ’ overall current account/GDP, its reserve changes, and the real overvaluation of its currency, and (2) variables suggestive of domestic American political expediency-- the bilateral trade balance, US unemployment, and an election year dummy. The econometric results suggest that the Treasury verdicts are driven heavily by the US bilateral deficit, though other variables also

This paper reviews Japan’s experience in its attempt to internationalise its currency, from 1984 to 2003. Although the efforts began reluctantly in 1984 under pressure from a foreign government, it soon became the stated policy of the Japanese government to “internationalise the yen”. The government defined the internationalisation of the yen as “the

An important puzzle in international macroeconomics is the exchange rate disconnect puzzle. Nominal exchange rates seem to be unrelated to other macroeconomic variables, for example, export quantities. This paper uses Japanese firm level data to examine whether exchange rate fluctuations are strongly related to the export quantities of firms. We build a simultaneous nonlinear structural model with external financing costs, and estimate the model on 14 separate Japanese 4 digit level industries. We find that export volumes at the firm level are significantly affected by exchange rate fluctuations. We find higher elasticit ies of exports with respect to exchange rates than in previous work. Our results cast some doubt on the prevailing wisdom that exchange rates have no effect on trade. Finally, we find in our data that financing constraints play an important role in affecting the sensitivity of exports to exchange rate fluctuations. Firms that are less financially constrained −for example, keiretsu firms − tend to have lower exchange rate elasticities, which is consistent with our model. We thank Caroline Betts, Hyeok Jeong, Yong Kim, Roger Moon, and Aris Protopapadakis, for very helpful

The paper reaches seven conclusions regarding the Yen Bloc that Japan is reputed to be forming in East Asia and the Pacific. (1) Gravity-model estimates of bilateral trade show that the level of trade in East Asia is biased intraregionally, as it is within the European Community and within the Western Hemisphere, to a greater extent than can be explained naturally by distance. One might call these three regions "super-natural" blocs, in contrast to Krugman's "natural" trade blocs. (2) There is no evidence of a special Japan effect. (3) Once one properly accounts for rapid growth in Asia, the statistics do not bear out a trend toward intraregional bias of trade flows. (4) The world's strongest trade grouping, whether judged by rate of change of intra-group bias or (as of 1990) by level of bias, is the one that includes the U.S. and Canada with the Asian/Pacific countries, i.e., APEC.

This paper was written for a colloquium on International Financial Integration and the Conduct of U.S. Monetary Policy, held at the Federal Reserve Bank of New York, October 13, 1989. It is forthcoming in a N.Y. Fed volume, Spring 1990. I would like to thank Julia Lowell for research assistance. Some sections draw on joint work with Ken Froot and Cara Lown. I would also like to thank M. Akbar Akhtar, Peter Kenen, and Charles Pigott for comments

This paper was written for the Sixth International Conference of the Institute for Monetary and Economic Studies, Bank of Japan, on the theme Financial Stability in a Changing Environment, held in Tokyo, October 28-29, 1993. The volume is forthcoming from The MacMillan Press. The author would like to thank Robert Parry, Graeme Thompson, and other participants at the Bank of Japan conference for helpful comments; Eduardo Borensztein, Steven Vries and other members of the IMF Research Department for useful discussion; and Bill Norton of Macquarie University, Stephen Grenville of the Reserve Bank of Australia, and Soo Gil Lee of the Bank of Korea, for making available helpful materials. He would also like to thank Gikas Hardouvelis and Thierry Wizman for making available their data on country fund discounts, and Yutong Li for research assistance. He bears full responsibility for any views expressed. Jeffrey A. Frankel Senior Fellow Institute for International Economics 11 Dupont Circle, NW Washington, DC 20036 USA This paper was written for the Sixth International Conference of the Institute for Monetary and Economic Studies, Bank of Japan, on the theme Financial Stability in a Changing Environment, held in Tokyo, October 28-29, 1993. Outline I. THREE STAGES OF FINANCIAL DEVELOPMENT I.1 Internal Finance I.2 Intermediation I.3 Securitization II. THE RECENT EMERGENCE OF SECURITIES MARKETS IN THE ASIAN PACIFIC II.1 Money Markets and Bond Markets II.2 Equity Markets II.3 Derivatives III. THE CASE OF KOREAN FINANCIAL LIBERALIZATION III.1 Past Attempts at Financial Reform III.2 U.S. Pressure III.3 Korean Reluctance to Liberalize III.4 The Five-year Plan of 1993 IV. THE INTERNATIONAL DIMENSION: RECENT CAPITAL INFLOWS TO LDCs IV.1 Do Capital Inflows Pose Difficulties? IV.2 Does Fi...

On the Renminbi: The choice between adjustment under a fixed exchange rate