How Do People Form the Perception of a Link between Foreign Exchange Rates and Exports? The Experience of Japan in the 1920s

Perceptions of the effects of exchange rate fluctuations may influence policymaking processes. We examine how people understood the relationship between exchange rates and exports taking into account the interwar period in Japan, when exchange rates fluctuated and a policy debate regarding returning to the gold standard was active, as an example. The results of textual analysis drawing on newspaper articles from 1925 to 1929 assure that people clearly recognised a relationship between exchange rates and exports, while they also paid attention to the relationship between exchange rates and imports. By detailed analysis of historical materials of major export sectors, namely raw silk and cotton yarns and cotton fabrics, we find that neither sector preferred weak foreign exchange rates and they even called for the gold standard with pre-WWI parity with stronger yen rates. The results of the analyses on profit structures of those sectors show that the producers of raw silk preferred stable exchange rates to a cheaper yen because of the risk transfer system and the market structure. The results also indicate that cotton yarn and fabric sectors preferred a stronger yen for cheaper raw materials with the considerable share of domestic sales of their products.