The influences of economic openness on Japan's balancing item: an empirical note

Abstract

Exploring the factors influencing the balancing item of balance of payments accounts has seldom been a subject of research in international economics. Following Brooks and Fausten (1998), and using Japan's data, this study has empirically examined the influences of economic openness on balancing item. The results of subset VAR (Vector Autoregression) approach, Granger causality test, impulse responses function, and variance decomposition have showed that, to a certain extent, economic openness does influence the behaviour of Japan's balancing item.

Notes

¹ Fausten and Brooks (1996) have examined the balancing item of Australia's balance of payments accounts. Using a data-driven approach, they run a regression Ordinary Least Square (OLS) of the balancing item on the gross transactions flows of the main components of the balance of payments. The results clearly rejected the hypothesis that recording mistakes constitutes a major source of the balancing item. They further have highlighted the potential role of economic influences on the time pattern of the balancing item via exchange rate (proxy of relative price) that affects all cross-border transactions, and the extent of economic openness (Fausten and Brooks, 1996, p. 1311). Empirical results from the OLS regression models showed that exchange rate volatility, and the degree of economic openness failed to influence the Australia's balancing item jointly. With the recent advancement in time series econometrics, however, OLS regression used in Fausten and Brooks (1996) is found to be unsatisfactory to draw a conclusive finding.

² Following Fausten and Brooks (1996, p. 1311), and using Japan's data, the author of this study has empirically examined the influences of exchange rate volatility on balancing item. To a certain extent, the results of Subset VAR, Granger causality, impulse response and variance decomposition support the view that exchange rate does influence balancing item patterns in Japan. The crude version of this manuscript is available from the author upon request.

³ This study does not employ the new-known approach of co-integration for examining the possible long run relationships between economic openness and balancing item in Japan. Perhaps, economic theory should be used to support the use of co-integration approach. As noted, the influences of economic openness on balancing item are an empirical issue instead of theoretical argument. Balancing item is fundamentally accounting matter from the balance of payments accounts, and no economic theory to say about its economic relations. The relationships between balancing item and economic openness can be explained from the behavioural economics’ viewpoint.

⁴ The conventional VAR estimates with 12 lag length (in quarters) are not reported here, but available from author.

⁵ The P-value for BI in levels is 0.00 (trend and constant) implying the rejection of null that BI has a unit root. However, for EO in levels, the P-value is 0.7091 (trend and constant), and the P-value for DEO (D denotes first difference operator) is 0.000, thus EO is I(1).

⁶ Since this study emphasizes on the influences of economic openness on Japan's balancing item, thus the VAR estimates of EO equation has not been reported here but is available from author upon request.

⁷ A Portmanteau test (Lütkepohl, 1993) for residual autocorrelation may be applied if a pure VAR process possibly with subset restrictions but without exogenous variables has been fitted – the null hypothesis is no residual autocorrelation.