The rapid depreciation of the yen since the end of 2012 was expected to improve Japan's trade balance as a weaker yen increases import prices and raises the trade deficit in the short run. Over time, however, it was expected that Japan's trade balance would improve in line with the J-curve effect as the weaker yen translates into lower and more competitive export prices of Japanese products, which in turn would lead to a rise in the volume of exports. In reality, Japan's trade balance has worsened rather than improved, indicating that the exchange rate is not the true cause of trade deficits, and giving rise to the concern that Japanese products may be losing their competitive appeal in the global market. In the May issue of the RIETI Report, we present a non technical summary of the discussion paper "Abenomics, Yen Depreciation, Trade Deficit, and Export Competitiveness" written by Junko Shimizu of Gakushuin University and Kiyotaka Sato of Yokohama National University.
Shimizu and Sato make three arguments in response to this observation: exchange rate fluctuations in the 2000s had a weaker impact on the trade balance than in the mid-1980s through the 1990s as Japanese companies expanded their production networks in other Asian countries, creating a structure where much of the export-boosting effect of a weaker yen is negated; the yen's depreciation has not led to a decline in the local currency prices of Japanese products in their export destinations; and the rapid depreciation of the yen since the onset of Abenomics has enabled Japanese companies to narrow the gap with their South Korean rivals significantly in terms of export price competitiveness. Shimizu and Sato conclude by providing policy implications that can be drawn from these observations, including Japan's re-examining of its long term energy policy to provide and develop more affordable energy sources and maintaining the flow of overseas earnings repatriating back to Japan, with the hope that the government will implement the third arrow of Abenomics, the growth policy, into concrete action as soon as possible to foster competitiveness.
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Abenomics, Yen Depreciation, Trade Deficit and Export Competitiveness
SHIMIZU Junko Gakushuin University
SATO Kiyotaka Yokohama National University
The advent of Abenomics in December 2012 brought a significant change to the U.S. dollar/Japanese yen exchange rate. The yen remained at a record high level, trading below 80 per dollar, up until mid-November 2012. However, amid growing expectations for Abenomics, the yen weakened rapidly to the 90 level in the latter half of January 2013 and slightly below 100 in early April 2013. The exchange rate has remained stable since at around 100 yen per dollar as of March 2014.
There was a strong expectation that the rapid depreciation of the yen since the end of 2012 would improve Japan's trade balance. A weaker yen increases import prices and causes the trade deficit to rise in the short run. Over time, however, it was expected that Japan's trade balance would improve in line with the J-curve effect as the weaker yen translates into lower and hence more competitive export prices of Japanese products, which in turn would lead to a rise in the volume of exports. In reality, Japan's trade balance has worsened rather than improved. This indicates that the exchange rate is not the true cause of trade deficits, giving rise to the concern that Japanese products may be losing their competitive appeal in the global market.
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