Suppose an American citizen purchases a TV from Sony (a Japanese company). Sony then uses the dollars to purchases U. S. Treasury bonds. How will this transaction enter into the Japanese balance of payments?

The Japanese Current account will decrease, while the capital account will increase.

Explanation: Balance of Payment (BOP) is a record of all a country's transaction between its citizens and the rest of the world at a particular point in time. Its components include Current Account and Capital Account.

A country's Current Account reflects its trade balance (meaning its imports and exports), net income, direct payments of funds, and also international transfers of equity. Therefore when Sony sells a TV in America, the country's current account increases.

However, the current account will decrease when Sony buys U.S. Treasury bonds, because Sony has deducted part of its earnings in the current account to make this purchase.

A country's Capital Account reflects the financial transactions undertaken by the country and that will affect its future income. Therefore, Japan's Capital Account will increase because it has made an investment in U.S. Treasury bonds that will positively affect its future income.

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