Viewed by a Tokyo bank. To simplify, we assume that the correspondent bank is the same bank from

which the American importer obtained $3 billion draft.

Note these salient points. First, Japanese exports create a foreign demand for yen, and the

satisfaction of this demand generates a supply of foreign monies — dollars, in this case — held by

Japanese banks and available to Japanese buyers. Secondly, the financing of a Japanese export

(American import) reduces the supply of money (demand deposits) in the USA and increases the

supply of money in Japan by the amount of the purchase.

2. Import bank transactions. As just indicated, a Tokyo bank is a dealer in foreign exchange; it is

In the business of buying — for a fee — and, conversely, in selling — also for a fee — yen for dollars.

Having just explained that a Tokyo bank would buy yen for dollars in connection with the American

export transaction, we shall now examine how it would sell yen for dollars in helping to finance

a Japanese import (American export) transaction. Specifically, suppose that a Japanese retail concern

wants to import $3 billion worth of semiconductors from an American firm. Again we rely on

simple commercial bank balance sheets to summarize our discussion (Table 8.2).

Table 8.2. Financing a Japanese import transaction

New York Bank Tokyo Bank

Assets Liabilities and net worth Assets Liabilities and net worth

Demand deposit of

American exporter

+300 billion yen (b)

Deposit of Tokyo bank

-300 billion yen (a)

Deposit in American

bank

—300 billion yen (a)

($3 billion)

Demand deposit of

Japanese importer

—$3 billion (a)

a) Because the American exporting firm must pay its obligations in yen rather than dollars,

the Japanese importer must somehow exchange dollars for yen. It can do it by going to a Tokyo

bank and purchasing 300 billion yen for $3 billion — perhaps the Japanese importer purchases

the very same 300 billion yen which a Tokyo bank acquired in the previous Japanese export

transaction. As shown in Table 5, this purchase reduces the Japanese importer’s demand deposit

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in a Tokyo bank by $3 billion, and, of course, a Tokyo bank gives up its 300 billion yen deposit in

a New York bank.

b) The Japanese importer sends its newly purchased check for 300 billion yen to the American

firm, which deposits it in a New York bank. Note the +300 billion yen deposit in the liabilities and

net worth column of Table 5.

We find that Japanese imports create a domestic demand for foreign monies (dollars, in this case)

and that the fulfilment of this demand reduces the supplies of foreign monies held by Japanese banks.

Moreover, Japanese import transactions increase the supply of money in America and reduce the

supply of money in Japan.

Japanese exports (in this case, cars) make available, or “earn,” a supply of foreign monies for

Japanese banks, and Japanese imports (American semiconductors, in this instance) create a demand

for these monies. That is, in a broad sense, any nation’s exports finance or “pay for” its imports.

Exports provide the foreign currencies needed to pay for imports. We note that American

exports of semiconductors earn a supply of yen, which are then used to meet the demand for yen

associated with American imports of Japanese cars.

Postscript: Although our examples are confined to the exporting and importing of goods, we

shall get convinced momentarily that demands for and supplies of dollars, yen, pounds and other

freely convertible currency also arise from transactions involving services and the payment of interest

and dividends on foreign investments.