Exchange Rate Pass-Through in the Japanese Electronics Industry
Senior Fellow, RIETI
The value of Japan's electronics exports has exceeded $100 billion every year since 1993. Before the Global Financial Crisis, almost 20% of Japan's exports were electronics goods. How have these exports been affected by the floods, earthquakes, and macroeconomic shocks that have roiled Japan in recent years?
Electronics exports within East Asian production networks
Many Japanese electronics exports take place within East Asian production networks. Figure 1a shows the value of Japanese electronics parts and components exports to the primary Asian supply chain economies (China, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand). The figure shows that the value of exports fell logarithmically by 100% between the collapse of Lehman Brothers in September 2008 and the trough in January 2009. It also shows that the value of exports averaged about 25% below its pre-crisis level, even three and a half years after the Lehman Brothers shock. Furthermore, the figure shows that exports only declined 7% following the March 2011 Great East Japan Earthquake and regained its pre-quake level by June 2011. Figure 1b looks at the ASEAN countries. The figure shows that the decline associated with the 2011 Thailand floods has been limited largely to exports to Thailand, and that the value of exports to other supply chain countries has not been affected.
Figure 2 examines the volume of electronic parts and components exports to ASEAN, China, and the newly industrialized economies (NIEs) (i.e., South Korea and Taiwan). The volume fell logarithmically by 88% between August 2008 and January 2009. It recovered quickly, though, and by 2010 had surpassed its pre-crisis level.
The fact that the value of exports has not recovered to its pre-crisis level while the volume has surpassed its pre-crisis value implies that export prices have fallen. Indeed, Bank of Japan data indicate that the yen price of electronic components and devices (ECD) exports has fallen by 56% between January 2005 and November 2011.
Exchange rate changes and export prices for electronics goods
Ongoing work at RIETI that I am engaged in indicates that ECD export prices in the short run respond essentially one-for-one to changes in exchange rates. This finding implies that the 28% appreciation of the yen between June 2007 and the end of 2011 caused the yen price of ECD exports to fall by 28%.
A difficulty with interpreting this result is that trade in East Asian production networks is often invoiced in dollars. It is possible that Japanese multinational companies (MNCs) allow the yen prices of parts and components to vary one-for-one with changes in the exchange rate, but then adjust import prices when selling the assembled finished goods in the final markets. For instance, if a Japanese company assembles a computer in China using parts and components from Japan and sells the final product in Europe, it may not adjust the dollar prices of parts and components shipped to China but may adjust the euro price of the computer sold in Europe to reflect exchange rate changes.
One way to test whether Japanese firms can pass through exchange rate changes for final electronics exports produced in production networks is to examine whether they can pass through exchange rate changes for final electronic goods produced in Japan. These final goods from Japan tend to be sophisticated, knowledge-intensive products produced by skilled workers. On the other hand, the final goods produced by Japanese MNCs in supply chain countries like China tend to be lower-end, unskilled labor-intensive products. If Japanese firms do not have pricing power over the higher-end goods produced in Japan, they are unlikely to have pricing power over the more homogeneous goods assembled in lower wage countries.
Empirical results indicate that Japanese information and communication equipment (ICE) producers can only pass through less than 20% of exchange rate changes into import prices in the importing countries' currencies and have to absorb the rest in their own markups. This finding indicates that the 28% appreciation of the yen between June 2007 and the end of 2011 caused the yen price of ICE exports to fall by 22%. Yen export prices for ICE goods fell 20% more than yen costs over this period. Thus, the strong yen has severely squeezed profit margins for electronics firms in recent years.
March 12, 2012
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