system, which is itself predicated and determined by the international financial system.
By late 1990, nominal short-term interest rates had risen 350 basis points
in Japan, and the growth rate of the Japanese money supply had plummeted in
response. Real long-term interest rates rose by more than 200 basis points from
late 1989 until late 1990. The latest decline of the Japanese stock market, which
occurred between October 1991 and April 1992, saw a fall of 30% and placed the
Tokyo Stock Exchange (TSE) price/earnings ratio in the neighborhood of 30, just
above that for the Standard and Poor's 500 in the US market. Despite the stock
market bubble and the change in short-term Yen interest rates, see notes 11 and
12 infra, the Yen-dollar exchange rate has been fairly stable, moving in a range
of 123-142 until late 1992 ( Alan Greenspan, Chairman, Board of Governors of the
Federal Reserve System before the Committee on Banking, Housing and Urban
Affairs, US Senate, April 19, 1992, p. 3), a far narrower percentage range than,
for example, the DM-dollar range. (Testimony of
Greenspan, p. 4)
Allen J. Lenz, "A Sectoral Assessment of U.S. Current Accounts of Deficit:
Performance in Prospects", in INTERNATIONAL ADJUSTMENT AND FINANCING: THE
LESSONS OF 1985 TO 1991 (
C. Fred Burgston, ed., 1991), which tells us that the key
to US external adjustment lies in the manufacturing sector. This concludes that
additional devaluation is required to achieve balance.
Masaru Yoshitomi, "Japan: Surprises and Lessons From Japanese External
Adjustment in 1985 to 1991", in INTERNATIONAL ADJUSTMENT AND FINANCING, supra
note 2, at 123.
David Meerschwam, "The Japanese Financial System and the Cost of Capital", in TRADE WITH JAPAN: HAS THE DOOR OPENED WIDER? (
Paul Krugman, ed., 1991); Jeffrey Frankel, Japanese Finance in the 1980's: A Survey, in TRADE WITH JAPAN,
Frankel, supra note 5.
Carl Kester, and
Timothy Luehrman, "Real Interest Rates and the Cost of
Capital: A Comparison of the United States and Japan", 1 JAPAN AND THE WORLD
ECONOMY, 279-301 ( 1989).
Carl Kester, and
Timothy Luehrman, "Cross-Country Differences in the
Cost of Capital: A Survey and Evaluation of Recent Empirical Studies," Time
Horizons of American Management and the Harvard Business School and The
Council on Competitiveness, p. 9, 1992.
Firms with identical assets but different capital structures have the same
cost of capital, according to the Miller-Modigliani theorem, M. Miller, and
, "The Cost of Capital, Corporate Finance and the Theory of Investment", 48 AM. REV., 261-297 ( June 1958). Two firms with identical assets and different
capital structures will have different costs of debt and equity, but their overall cost
of capital will be the same. Failure to abide by the Miller-Modigliani theorem has
been a flaw in all the studies that have found cost of capital differences between
the United States and Japan, according to Kester and
Luehrman, supra note 7.
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: The Law and Structure of the International Financial System:Regulation in the United States, EEC, and Japan.
Contributors: John H. Friedland - Author.
Publisher: Quorum Books.
Place of publication: Westport, CT.
Publication year: 1994.
Page number: 170.
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