Exchange rates and foreign trade - An example involving Japan and the USA

The aim of this paper is to challenge the widely made claim that a weaker c urrency will automatically improve the current-account balance. Its objecti ve is to present the puzzling fact that, for an open economy, a current-acc ount reaction to nominal exchange rate changes cannot be identified. Americ an politicians often use this incorrect interpretation as part of a protect ionist-trade strategy to force the Japanese yen higher, the author claims. Two simple models accompanied by empirical evidence are presented to illust rate the effect of such a faulty notion. The results indicate that enormous fluctuations of the yen exchange rate led the Bank of Japan to adjust its monetary policy and pushed it into its present (at the writing of this pape r) deflationary spiral.