Besmira Dervishi Japan's Current Account

As we can see from the graph, Japanese Yen has had a depreciation in 2013 and this depreciation continues further in 2014.

According to the underlying assumption of the DD-AA model: ceteris paribus, a real depreciation of the home currency immediately improves the current account while a real appreciation causes the current account immediately to worsen. What happened in Japan?

As shown in the graph above, starting from the 2013 Japan’s current account started to worsen and it recorded the lowest point of JPY billion in January 2014.

The current account worsened right after a real currency depreciation because most imports and exports orders are placed several months in advance. In the first months, the import and export volumes reflect buying decisions that were made on the basis of the old real exchange rate. The primary effect of the depreciation is to raise the value of the pre-contracted level of imports in terms of domestic products, while exports do not change much, except a light fall at the beginning of 2013.

CA = X - M X had a light increase. M increased significantly. CA (-) = X (+) – M(++) CA had a drastic fall.