Macroeconomic Impacts of the US External Imbalances with Two Large Emerging Asian Economies: Japan (1970–1990) versus China (2000–2018)

Abstract

This paper compares the US long-run macroeconomic effects of foreign direct investment from Japan (1970–1990) with foreign portfolio investment from China (2000–2018). Investment from the both countries lowers the US inflation rate, and the effect from Japan is stronger than that from China. While Japan’s investment in the 1970–1990 period accounts for 88% of the unemployment-reducing effect of the overall US financial account surplus, China’s investment in the 2000–2018 period explains 65% of the unemployment-deterioration effect as well as 96% of the inflation-reducing effect of the overall US financial account surplus. The\xa0US inflation\xa0and\xa0unemployment impulse responses exhibit the pertinent supportive evidence.\xa0Furthermore, in contrast to Japan’s direct investment, China’s portfolio investment is more sensitive to dollar depreciation,\xa0higher inflation\xa0rate\xa0and lower real interest rate in the USA.