So, what we've seen so far in only looking at data, I'm not telling you history, okay? Only looking at data and letting it tell a story, we've seen so far a picture of a country that was growing very, very fast for many years, that all of a sudden slipped down to low or no growth, and it is trying to combat that and come back out to normal growth rates. We saw that fiscal policy is working hard at it, there's very expensive fiscal policy, very large debt that may have succeeded somewhat, we don't know what growth would have looked like without fiscal policy. Then we see there's an extremely expansive monetary policy, the most expansive we've seen anywhere. Interest rates at zero and a huge creation of commercial bank reserves by the central bank, which has bought massive amounts of bonds. Maybe that has also helped because Japan is getting a little bit more growth now. But those are the two policy tools that have been used. How else could Japan grow? Well, maybe it could grow by exporting to the rest of the world. In fact, Japan did have its miracle growth years by exporting much more than it imported from the rest of the world for a long period. How would we see that they're doing this? Well, the piece of data that we can look at is the current account, right? If a country has a current account deficit, it usually means that they are importing from the rest of the world more than they export to them. If they have a current account surplus, it means that they are exporting to the rest of the world more than they are importing from them, generally. We saw that the United States had a large and chronic current account deficit. Well, Japan, in this slide, you can see is a sharp contrast because Japan has a large and chronic current account surplus as a percentage of GDP sometimes reaching close to five percent. And it's gone down in some years, but the current account has not balanced in the period I'm showing on this slide. So, we have a chronic current account surplus. Why is this surplus happening? Well, as we discussed in the globalization course and in our quick review of theory, a country becomes a current account surplus country because they save more than they invest, or they save more than they borrow would be another way of thinking about it, or they produce more than they consume. One way of looking at this is a contrast between savings rates and investment rates. On this chart I show you a number of years of savings and investment rates for the United States, and for Japan. If you look at the pairs of figures, you will see that in the United States, consistently, investment is higher than savings. This will lead them to have a current account deficit. They are borrowing from the rest of the world in order to be able invest all of this which they can't pay for with their own savings. And Japan, you will see is exactly the opposite. In Japan, they save a lot, and they also invest a lot, but they don't invest enough to use up all of their savings. Savings is greater than investment, this is a characteristic of a current account surplus country, so what does Japan do with the extra savings? Well, they'd lend them to countries like the United States, so they will buy their extra goods. As we mentioned with the United States, there are characteristics that are common to countries that have current account deficits, and to countries that have current account surpluses. So we saw the case of the United States, now let's look at Japan. A country that has a current account surplus, looks like they might be pretty independent because they're able to export more than they import, looks like they're competitive, efficient, but they have some real problems, some real vulnerabilities. One is that these countries, since they produce more than they consume, they need somebody to buy their extra things. Imagine that Japan produces 100, consumes 80. If Japan can't get somebody to buy those extra 20, their GDP shrinks, because they will produce the next year exactly what was consumed. So, Japan needs foreign countries to buy their extra goods to keep GDP as high as it is. The idea is if foreigners did not buy Japanese goods, Japan would have to shrink, and become a smaller country. Another thing, another vulnerability or problem for current account surplus country is they need to lend money to the rest of the world, because of the rest of the world is buying their extra goods, I have to lend the money so that they can do that, right? So, Japan becomes a lender to the countries that import from them. Now, they can do that because as we just saw, they have excess savings, but still if those countries are not exactly credit worthy, those might not be very good, that might not be a very good use of their money. Another issue about a current account surplus country is that their currencies have a tendency to rise in value. Especially as the surplus grows, their currency will tend to rise. Now think about this carefully. If I am a country that needs to export more than I import as Japan does, if it wants to stay the size it is. It needs to export more than it imports. It would also like to have a low currency, right? Because you remember from the globalization course, and from our quick review of theory, that if your currency is low in value, you are able to export more. If it's high in value, you usually can export less. So, here you see a problem for Japan, don't you? Because they need to export, they need to export a lot in order to grow, and yet their currency wants to rise. Here we're going to see one of the keys of Japan's growth strategy, which is the value of its currency.
