Abenomics, Yen Depreciation, Trade Deficit and Export Competitiveness (Japanese)

The sharp depreciation of the yen from the end of 2012 was expected to have a positive impact on the Japanese trade balance, since Japan had recorded large trade deficits since the Great East Japan Earthquake in March 2011. Trade balance tends to deteriorate at the beginning due to the J-curve effect. However, the Japanese trade balance has not shown any signs of improvement, even though one year has passed since the start of the yen depreciation. There is a growing concern that Japanese firms might lose export competitiveness in the global market. This paper empirically shows that Japanese firms expanded overseas production after the sharp appreciation of the yen from 2008 to 2012, which resulted in the increase in Japanese imports of intermediate inputs as well as finished products. The empirical result of an auto-regressive distributed lag (ARDL) model also indicates that the long-run impact of yen depreciation has weakened in recent years. It is demonstrated that Japanese manufacturing export prices in terms of the contract (invoice) currency have not changed in response to the large exchange rate fluctuations of the yen, which is empirically confirmed by the exchange rate pass-through analysis. Finally, a comparative analysis of the industry-specific exchange rate between Japan and Korea shows that the recent depreciation of the yen has improved the export price competitiveness of the Japanese manufacturing sectors.