The impact of exchange rates on Japan’s machinery exports since 1990

Japan produces and exports a sophisticated basket of machinery and capital goods. Following the global crisis, it offshored manufacturing of parts and components to Asian countries. This column studies the impact of exchange rate fluctuations on Japanese exports since 1990. It finds a strong effect between 1990 and 2010, when an appreciation of the yen by 10% would reduce machinery exports by 6%. However, since 2010, total machinery exports are less sensitive to exchange rates, particularly exports to Asian countries. However, a depreciating yen boosts the profitability of Japanese manufacturers and their exports to non-Asian countries.

Japan produces and exports high-quality machinery and capital goods. These include excavators, machine tools, turbines, robots, machinery to manufacture semiconductors and textiles, and other capital goods. Japan has traditionally played an important role in exporting these goods to downstream Asian countries. Kwan (2004) noted that if Asian firms are unable to obtain capital goods from Japan, they are frequently unable to obtain them at all. What factors influence the ability of downstream firms to obtain these vital inputs?

Japan’s exports are sophisticated. Using Hidalgo and Hausmann (2009) complexity measures, Japan’s export basket has been rated as the world’s most sophisticated in every year between 2000 and 2021. The Japanese machinery export basket is also more sophisticated according to the Hidalgo and Hausmann measure than the machinery exports of other leading exporters such as China, the US, and Germany.

Are these sophisticated exports sensitive to exchange rates? This question is relevant as the Japanese real effective exchange rate in 2024 is at its lowest level over the 44-year period for which the Bank of Japan provides data (see Figure 1). Abiad et al. (2018) noted that more complex goods are harder to produce and thus have fewer substitutes. Because of this, they reasoned that the price elasticity of demand should be lower for more complex products and thus that exports of these goods should be less sensitive to exchange rates.

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