• Japan extends ¥200 billion in agricultural credits to the Vietnamese government. These
credits are 30-year loans at 2% interest which can only be used for purchases of agricultural
equipment from Japanese producers.
• The Japanese government also will purchase another ¥100 billion in natural gas from newly
developed resources in Vietnam.
• Finally, Japan offers a ¥5 billion technical assistance grant for Vietnamto hire Japanese
experts on environmental cleanup.
The bad news is Fuji Bank has decided to call due—rather than roll over—some loans to
Vietnam’s government. When the loans are repaid on June 15, there will be ¥10 billion in
principal plus a quarterly interest payment of ¥250 million due.
For this exam, assume Vietnam is operating on its production possibility frontier—full
employment of capital and labor—and Japan’s economy has excess capacity and
unemployment. For all questions, assume Vietnam’s dong has a fixed exchange rate and is
not easily convertible to dollars in the open market except for question 3. All transactions
occur this year.
- How would Japan account for these transactions in its balance of payments for this year?
Assume that the Fuji bank loans are repaid by putting bags of yen on a jumbo jet and
transporting them to Tokyo. All other payments will be settled through the banking
system.(5 points) (HINT: This is an accounting question, not a behavioral question!) - How might Vietnam’s economy and trade balance adjust after the transfer package of ag
credits and technical assistance is implemented and why? How will the official settlements
balance adjust? If Vietnam’s current account was in balance before these transfers—and if
there are no changes in monetary or fiscal policy and the exchange rate is not changed—is
there some mechanism that will push Vietnam’s external accounts back to balance after the
payments are made? Should there be? Will the central bank of Vietnam find big yen
balances building up in its international reserves? (10 points) - If you were the Finance Minister of Vietnam—which would mean that you could direct
both fiscal and monetary policy and set the exchange rate—what course of action might you
follow to achieve full employment, price stability and current account balance after the
implementation of this package? Would you have more options if the exchange rate were
not fixed? For this question and for this question only, you may assume that the exchange
rate is fixed, but adjustable by the government. 10 points)
4.Will this program narrow Japan’s current account deficit? How will Japan’s Official
Settlements balance be affected? Why? What response would you propose to Prime Minister
Kishida-san to narrow or to eliminate the current account deficit?