Weathering Safe Haven Capital Flows: Evidence from the Japanese Transportation Equipment Industry

When risk aversion increases, countries with safe haven currencies such as Japan and Switzerland can experience large appreciations. These appreciations may squeeze profit margins and lower export volumes. This paper investigates whether firms in these countries can weather appreciation periods by producing differentiated rather than commoditized products. To do this, it investigates different sectors within the Japanese transportation equipment industry. Results from estimating pricing-to-market (PTM) coefficients indicate that firms producing differentiated products can pass-through more of exchange rate appreciations into higher foreign currency prices and thus better preserve their profit margins. Results from estimating trade elasticities are consistent with the PTM results and indicate that the automobile industry has exported much less than predicted after the yen depreciated in 2012. Finally, estimates of the stock market exposure across sectors indicates that the profitability of firms producing differentiated products are less exposed to appreciations. Producing differentiated, knowledge-intensive goods can thus help firms survive risk-off periods.