Oil Price, Exchange Rate Shock, and the Japanese Economy

Using the framework of structural vector autoregressions (VAR), this paper provides a quantitative assessment of the relative importance of exogenous shocks to Japanese output as measured by aggregate sales, industry sales, and the sales of different firm size groups. We assume four structural shocks, namely, (i) oil supply shock, (ii) oil price fluctuations not related to supply and demand, (iii) world economic activity (aggregate demand shock), and (iv) exchange rate fluctuations not related to other structural shocks. Exogenous variation in oil production has almost no effect, while global economic conditions have a clear positive effect on output. The impact of the exchange rate depends on industry and firm size. Although the appreciation of the yen has a negative impact on the Japanese economy as a whole, it has a clear positive effect on small and medium-sized enterprises in the non-manufacturing sector. The results of this paper suggest that recognizing the difference between fluctuations in the exchange rate and an exchange rate "shock" is important for macroeconomic policy management. In particular, a large fraction of the yen's appreciation following the Lehman Brothers collapse can be explained by the sudden slowdown in global real economic activity and the sharp decline in crude oil price. If we ignore those factors, the negative impact of the yen's appreciation on the Japanese economy will be exaggerated largely.

The English version of this paper is 15-E-028.