Understanding the Evolution of Japan's Exports

This paper uses a gravity model to investigate the evolution of Japan's exports. Before the U.S. housing bubble burst in 2007, Japan's exports to the United States were $40 billion more than predicted each year, but they have moderated since then. Japan's exports to China increased markedly relative to predicted values after China joined the World Trade Organization in 2001. Evidence from disaggregating Japan's exports into ordinary and processing trade indicates that this increase in exports to China was driven by a surge of parts and components for re-export, and that Japan's exports of goods for the Chinese domestic market remained negative outliers. Japan's exports to South Korea and Europe are also much less than predicted. If Japan entered into free trade agreements with China, South Korea, and the European Union, it would significantly increase its exports to these destinations. This would help Japanese companies to diversify their export structure and reduce their exposure to slowdowns in the United States and the Association of Southeast Asian Nations (ASEAN).