Large Japanese bank, probably located in Tokyo, which is a dealer in foreign exchange. The Japanese

firm is given 300 billion yen demand deposit in a Tokyo bank in exchange for the $3 billion

Check.

c) And what will a Tokyo bank do with $3 billion? It, in its turn, deposits dollars in a correspondent

American bank for future sale. Hence, we see that $3 billion of demand deposits appear

in the liabilities column of the balance sheet of the American bank. This +$3 billion is an asset as

Viewed by a Tokyo bank. To simplify, we assume that the correspondent bank is the same bank from

which the American importer obtained $3 billion draft.

Note these salient points. First, Japanese exports create a foreign demand for yen, and the

Satisfaction of this demand generates a supply of foreign monies — dollars, in this case — held by

Japanese banks and available to Japanese buyers. Secondly, the financing of a Japanese export

(American import) reduces the supply of money (demand deposits) in the USA and increases the

Supply of money in Japan by the amount of the purchase.

Import bank transactions. As just indicated, a Tokyo bank is a dealer in foreign exchange; it is

In the business of buying — for a fee — and, conversely, in selling — also for a fee — yen for dollars.

Having just explained that a Tokyo bank would buy yen for dollars in connection with the American

Export transaction, we shall now examine how it would sell yen for dollars in helping to finance