Abstract
This paper empirically and theoretically shows that thrift and the terms of trade in Japan, productivity of Japan and foreign countries, and the world long-term real interest rate are the economic fundamentals that determine the real exchange rate and the current account balance in Japan. This paper's empirical results imply that the large current account surplus in Japan can be explained by changes in those fundamentals to a great extent. They also provide an plausible explanation for how the simultaneous improvement of the current account balance and the appreciation of the real exchange rate in Japan could happen in the 1980s.J. Japan. Int. Econ., June 1997,11(2), pp. 143–184. Korea Institute of Finance, 7th Floor, K.F.B. Building, 4-1 Myeong-Dong 1 Ga, Chung-Ku, Seoul 110-121, Korea.
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