Sequencing of Capital Account Liberalization - Japan's experiences and their implications to China

This paper reviews Japan's experiences with the liberalization of capital accounts, and tries to identify their implications to China. Liberalization of capital accounts proceeded very gradually in Japan from the adoption of a system of general prohibition of foreign exchange and capital transactions in 1949 through the shift to a generally liberalized system in 1979. Meantime, Japan was exposed to the turbulent international financial markets due to the move from a peg to a float system of its currency and two oil crises. In response to the massive short-term capital flow in and out of the country caused by these shocks, Japan, which was generally headed for the liberalization of the capital accounts, was frequently forced to resort to foreign exchange and capital control measures to stabilize the market. These experiences by Japan seems to give valuable implications to China, for which significant enhancement of the flexibility of its exchange rate movement under the recently revised formal exchange rate regime and the liberalization of capital accounts continue to be important policy agenda in the years to come.