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Foreign Exchange Markets Paper

1988 words - 8 pages

"Foreign exchange markets are composed of international foreign exchange markets and international capital markets. International capital markets include international money markets, international stock markets, international bond markets, and international loan markets;" (Shenkar & Luo, 2005) all of these markets have a role in facilitating the international trade of the countries China and Japan. Although the theory of comparative advantage proves that China and Japan could both benefit from trading with one another, open trade between each nation has been "strained by competition for energy resources, disputes over the way history textbooks assess Japan's role in World War II, and Japan's pledge to aid the United States in defending Taiwan." (Kahn, 2005) "The foreign exchange market is where foreign currencies are bought and sold." (Shenkar & Luo, 2005) "It is the physical as well as institutional structures through which currencies are exchanged, exchange rates are determined, and foreign exchange transactions completed." (Daniels, Radebaugh, & Sullivan, 2004) Although trade specifically between China and Japan is somewhat restricted, both countries utilize the foreign exchange market to facilitate trade with the rest of the world. "A foreign exchange transaction is an agreement between a buyer and a seller for the delivery of a certain amount of one currency at a specific rate in exchange for some other currency." (Shenkar & Luo, 2005) Thus, China and Japan will conduct foreign exchange transactions on the foreign exchange market in order to enhance their global trading positions. According to Golub (2003), "The US, by weakening Japan's regional construction efforts, unintentionally enhanced China's strategic position. Regional economic integration, which earlier was led by Japan, is now happening under Chinese auspices." This example suggests that China has a stronger or more influential global trading position than Japan. Understanding the relative strengths and weaknesses of Chinese and Japanese currency as a function of trade between each nation; and China & Japan's participation in global trade with other countries must include an interpretation of the foreign exchange market's role in influencing each countries strategic policy.For most of 2006, the economic focus was on Asia's two growing giants, India and China. China's gross domestic product grew by more than 10 percent in 2006 and India expanded by more than eight percent. Japan, the world's second largest economy, also gave the region a lift with its longest period of recovery since it fell into a slump more than a decade ago.China's stock markets, which went nowhere for years, boomed in 2006; the Shanghai composite index doubled in value. In large part, initial public share offerings by state-owned companies drove the market. One listing alone - for China's biggest lender, the Industrial and Commercial Bank of China - raised a record $22 billion.China has...

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