Author: Willem Thorbecke, RIETI

Sato, Shimizu, Shrestha and Zhang (2013), Chinn (2013) and others reported that a depreciation of the yen causes Japanese exports to increase. However, following the implementation of Prime Minister Shinzo Abe’s stimulus packages in the third quarter of 2012, the yen has depreciated by more than 30% while Japanese exports have not increased.

Investigating the effect of exchange rates on Japanese exports is tricky, since more than 25% of Japanese exports are parts and components (p&c) and other intermediate goods. A depreciation in a downstream country importing p&c from Japan (equivalently, an appreciation of the yen) may increase its exports of final goods to the rest of the world and thus its imports of Japanese p&c that are used to produce exports. Therefore, a depreciation in the importing country and an appreciation of the yen may be associated with an increase in Japanese p&c exports. This effect can cloud estimates of exchange rate elasticities.

One way to circumvent this problem is to investigate exports of final goods. Since Japan is an upstream country in global value chains, much of the value added of Japanese final goods exports comes from Japan. Examining how the yen affects final goods exports should provide a cleaner test of how exchange rates affect Japanese exports rather than examining how the yen affect total exports.

In every year since 1990, Japan’s leading export category at the International Standard Industrial Classification (ISIC) 4-digit level has been motor vehicles. In 2014, more than 16% of the value of Japanese exports were in this category. I thus investigated how exchange rates affect the Japanese automobile industry.

Read the entire article on the RIETI website.