If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?

Show Answers

The yen would strengthen; Japan would experience a trade surplus.The yen would strengthen; Japan would face a trade deficit.The yen would weaken; Japan would maintain a trade surplus.The yen would weaken; Japan would encounter a trade deficit.No change in the yen's value; no effect on trade balance.

Explanation

When Japan invests abroad, capital outflows increase the supply of yen in foreign exchange markets, causing the yen to depreciate. This depreciation makes Japanese exports cheaper and imports more expensive, which tends to improve Japan's trade balance, resulting in a trade surplus.