[Why&Next] Wings for Japanese Exports Due to Yen Weakness? "Minimal Effect"

Bank of Korea Economic Research Institute Paper
Asymmetric Exchange Rate-Export Relationship After the Great East Japan Earthquake
Yen Value Increasingly Linked to Investment Returns Over Exports

Recent analysis suggests that the increase in Japan's exports due to the weak yen is not significant. Although Japanese companies had the capacity to lower the prices of export products because of the weak yen, they maintained prices and sought exchange gains, resulting in no increase in total export volume. Additionally, as Japanese companies expanded overseas and procured parts and production facilities locally, Japan's exports of intermediate and capital goods declined.

According to the paper "An Empirical Analysis of the Impact of Yen Exchange Rate Fluctuations on Japan's Exports," published recently in the Bank of Korea Economic Research Institute's 'Economic Analysis,' the weak yen has contributed minimally to Japan's real export growth.

The paper notes that Japan's trade patterns structurally changed following the Great East Japan Earthquake, and since then, the yen exchange rate fluctuations and Japan's exports have shown an asymmetric relationship. Professor Song Junheon of the Faculty of Commerce at Tokyo International University, who authored the paper, explained, "Analyzing time series data from January 2001 to March 2023, we confirmed that the yen exchange rate fluctuations and Japan's exports have moved asymmetrically before and after the 2011 Great East Japan Earthquake."

Illusion Caused by Exchange Gains... Export Share Actually Decreased

The study found that while Japan's export value increased in yen terms, there was no significant change when measured in dollars. In particular, despite the Japanese government's policy intervention causing an artificial depreciation of the yen after the Great East Japan Earthquake, Japan's exports did not increase as much as expected.

The fundamental reason is that Japanese companies were reluctant to pass exchange rate fluctuations onto export prices. Therefore, although the yen's depreciation did not lead to an increase in Japan's exports, it did increase the yen-denominated profits of exporting companies.

Professor Lee Changmin of the Department of Convergence Japanese Area Studies at Hankuk University of Foreign Studies explained, "During the Plaza Accord in the 1980s, when the yen appreciated and caused a recession, companies maintained local market share by not raising dollar-denominated prices and absorbing exchange losses. Conversely, when the yen depreciated, they also did not lower dollar-denominated prices." This means they earned exchange gains during the process of converting export payments received in dollars into yen.

Professor Song said, "This only caused an increase in export value in yen terms but did not significantly contribute to an increase in actual export volume," adding, "This is very different from past weak yen phases."

Another reason is the overseas expansion of Japanese companies after the Great East Japan Earthquake. Since the earthquake, Japanese manufacturing companies have increased their overseas presence, and the share of overseas production has also been on the rise. According to the paper, the overseas production share of Japanese manufacturing reached 25.5% in 2021, an increase of 5.5% compared to 2012.

As Japanese companies operating abroad increased their local procurement of parts and production facilities, exports of Japan's intermediate and capital goods noticeably declined. The study found that intermediate goods such as materials, processed goods, and parts had relatively higher average export growth rates during the pre-Great East Japan Earthquake period when the yen's value was continuously rising. For example, the share of parts, which had driven Japan's exports, shrank significantly from 31.7% in 2000 to 24.9% in 2022.

The Bank of Korea's Tokyo office also noted in its trend analysis released last month that "the trade balance maintained a surplus before 2010, but in the 2010s, despite a decline in the real effective exchange rate, the surplus size sharply decreased or deficits increased." The Tokyo office pointed out that "one reason for Japan's weak trade and service balances despite the record yen depreciation since last year is the change in trade structure," adding, "With the positive aspects of yen depreciation somewhat diminished compared to the past, there is growing advocacy for a stable trade structure transition independent of exchange rates rather than aiming for yen depreciation."

Japan's Trade Balance. Japan maintained a long-term trade surplus trend based on export competitiveness since entering the 1980s, but a trade deficit trend has become entrenched since the Great East Japan Earthquake in 2011. / Source: Bank of Korea Economic Research Institute

"Entering a New Phase from 'Trading Nation to Investment Nation'"

However, there is also a perspective that the impact of exports on the Japanese economy itself has decreased compared to the past. This view holds that Japan has transitioned from a 'trading nation' to an 'investment nation.'

Professor Lee said, "There is a common interpretation that the weak yen boosted exports and revived the Japanese economy, but this comes from the textbook assumption that exchange rate appreciation strengthens the price competitiveness of exporting companies, which is far from reality."

He explained, "Now Japan's income balance drives the current account surplus," adding, "According to the income balance development stage theory, Japan has entered the stage of a 'mature creditor nation.'" He forecasted, "Japan is becoming a country that relies on income from foreign assets and imports consumer and durable goods. The impact of exchange rates on investment income will be greater than on exports."

This content was produced with the assistance of AI translation services.