Why Japan lost its comparative advantage in producing electronic parts and components

Japanese exports in electronic parts and components dramatically fell in value after the Global Crisis and have not recovered until today. This column investigates why Japan lost this comparative advantage. It argues that capital inflows seeking safe havens during the crisis led to a sharp appreciation of the yen and caused yen export prices to tumble relative to production costs. Plummeting profits then hindered Japanese firms from investing enough in capital and innovation to compete with rivals.

Japanese researchers began studying transistors three months after they were invented at America's Bell Labs in 1947. Japanese companies then used transistors and other electronic parts and components to produce radios, television sets, Sony Walkmans, video cassette recorders, and computers. As the yen appreciated by 60% following the 1985 Plaza Accord, Japanese companies lost competitiveness in final electronics goods and moved upstream in electronics value chains. They focused on exporting electronic parts and components and capital goods to producers of final electronics goods abroad.

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