Abstract
Japanese exports did not immediately react to the depreciations of the yen after a change in the economic policy framework in 2012, with the launching of Abenomics. This article focuses on the Japanese foreign sector and investigates the extent to which exchange rate changes affect Japanese real exports. After studying the dynamic properties of the included time series variables, a vector error correction model was estimated for the period 1980–2016 based on trade data from the World Bank and the International Monetary Fund. This study investigated the dynamic causal relationships among real exports, external demand, price competitiveness, and real imports. Within a large body of literature on Japanese exports, most extant studies used the trade balance as the dependent variable. One novelty of this study is the estimation of a quatrovariate system in which the components of trade balance, namely real exports and real imports, are both endogenously determined. A unique long-run cointegration equation was identified in which the external demand for exports, as proxied by gross domestic product of the rest of the world combined, has the most significant impact on real exports. The elasticity of real exports with respect to the real exchange rate was 2.34. However, the speed of adjustment towards long-run equilibrium was about 9% per year, which was rather slow. The low speed of adjustment implies it would take approximately 10 years for the full adjustment to take place and, thus, provides a novel explanation as to why the yen’s depreciation, triggered by Abenomics, did not boost Japanese exports as was expected by the Japanese government.
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Notes
To achieve this objective, the BOJ launched massive purchases of assets. It also changed the composition of its portfolio bond holdings from short-term to long-term, aiming to flatten or to invert the yield curve. This is the qualitative easing part of the QQME
Quantitative and Qualitative Easing (QE) is a new monetary policy where the central bank (Bank of Japan (BOJ)) buys massive amounts of public and private assets to boost the economy by providing an unprecedented amount of liquidity. In the U.S., for example, when QE was first launched in November 2008, the Fed purchased: 1) $1.25 trillion of mortgage backed securities, 2) $300 billion government securities, and 3) $175 billion Fannie Mae and Freddie Mac debt. This is much different when the Fed employs open market operations to keep the federal funds rate close to the target rate.
See Lal and Lowinger (2002) for evidence of the J-curve in east Asian countries.
Upstream countries refer to countries that export sophisticated capital goods, which are used as inputs in the production of other countries.
The U.S. and China are the two leading destination countries for Japanese export. According to data from the Organization of Economic Cooperation and Development (OECD 2018), exports to these two countries combined accounts for 40% of the total Japanese export in 2017.
ELG was first rejected by Boltho (1996) in a bi-variate Granger causality framework. After accounting for the “indirect causal paths” that may still exist because of the correlation of stochastic disturbances, Awokuse (2005) found that the causal path between exports and GDP growth in Japan is bi-directional. Balcilar and Ozdemir (2013) found a similar bi-directional causality from the mid-1970s to the late-1980s, while from the late 1990s to 2009, there is a positive predictive power only from export growth to output growth.
Export deals are based on actual or expected international prices of the specific product, and not based on the ex-post real exchange rate. Hence, export contracts may react slowly to changes in the nominal and real exchange rate. As such, the positive relationship between the yen-per-dollar ER and real exports was expected to hold in the long run.
Exports and imports were expected to be closely related. The only way that a country can pay for its imports, in the long run, is via revenue earned from its exports.
World GDP excludes real Japanese GDP.
The dip in real world GDP is not as evident as it was with real exports and imports (Figure 1) because the latter were measured in billions of yen, whereas real world GDP was measured in trillions.
A Lagrange Multiplier test was performed to check for evidence of residual serial correlation. Results from this test are reported in Table 3 in the Online Supplemental Appendix. The structural stability of the model was also examined using two graphical tests, the cumulative sum (CUSUM) and the CUSUM of squares. The graphs of these tests appear in Figure 1 of the Online Supplemental Appendix.
Relevant right-hand side differences were used to exclude a test of the lagged differences of the left-hand side variable on itself as this is not meaningful.
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Acknowledgements
The authors acknowledge Christopher Newport University for providing research assistantship to Mr. Zachary Timmerman. The research assistantship was funded by a Faculty Development Grant and the Department of Economics. There are no conflicts of interest to declare. Data and code for replication can be obtained from the corresponding author upon request.
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Jiang, Y., Zestos, G.K. & Timmerman, Z. A Vector Error Correction Model for Japanese Real Exports. Atl Econ J 48, 297–311 (2020). https://doi.org/10.1007/s11293-020-09675-1
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DOI: https://doi.org/10.1007/s11293-020-09675-1