Global imbalances, triangular trading patterns, and the yen/dollar exchange rate

Trade imbalances between Japan and the U.S. could cause the yen to appreciate against the dollar. Evidence presented here indicates that this could increase the U.S. trade deficit with Japan. An appreciation of the yen against the dollar would also cause the yen to appreciate against the RMB and other currencies in East Asia with heavily managed exchange rate regimes. Results reported here indicate that this would reduce the flow of capital and intermediate goods from Japan to East Asia, forcing firms to economize on sophisticated technology-intensive inputs that are difficult to procure elsewhere. This problem would be mitigated if countries in developing Asia adopted more flexible exchange rate regimes. J. Japanese Int. Economies 22 (4) (2008) 503-517.