The Determinants of Capital Controls and Their Effects on Trade Balance During the Period of Capital Market Liberalization in Japan

Shin-ichi Fukuda ()

Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper empirically investigates the determinants of capital controls and their effects on trade balance during the period of capital market liberalization in Japan. As is well known, the capiral market in Japan was gradually liberalized in the 1970s. By paying the special attention to the role of Japan's Multinational Trading Companies, the paper analyzes how different effects capital controls had on trade balance in the 1970s. In the analysis, we measure the degree of capital liberalization by the deviation from the covered interest rate parity condition. If the capital market is perfectly liberalized, this covered interest rate parity condition must always hold. In fact, after December 1980, the deviation from the covered interest rate parity condition became negligible in Japan. However, the deviation was very significant for several periods in the 1970s. Thus, we can approximately measure the degree of capital control in Japan by using this deviation in the 1970s. In the paper, we first reconfirm the previous proposition that the degree of capital control in Japan was determined by the excess deficit and surplus in current account in the 1970s. We then empirically show that Japan's Multinational Trading Companies played the special role in changing the distributional pattern of Japanese internationl trade under capital controls.

Date: 1993-03
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hituec:a270

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