A Vector Error Correction Model for Japanese Real Exports
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A Vector Error Correction Model for Japanese Real Exports Yixiao Jiang 1 & George K. Zestos 1
& Zachary
Timmerman 1
# International Atlantic Economic Society 2020
Abstract Japanese exports did not immediately react to the depreciations of the yen after a change in the economic policy framework in 2012, with the launching of Abenomics. This article focuses on the Japanese foreign sector and investigates the extent to which exchange rate changes affect Japanese real exports. After studying the dynamic properties of the included time series variables, a vector error correction model was estimated for the period 1980–2016 based on trade data from the World Bank and the International Monetary Fund. This study investigated the dynamic causal relationships among real exports, external demand, price competitiveness, and real imports. Within a large body of literature on Japanese exports, most extant studies used the trade balance as the dependent variable. One novelty of this study is the estimation of a quatrovariate system in which the components of trade balance, namely real exports and real imports, are both endogenously determined. A unique long-run cointegration equation was identified in which the external demand for exports, as proxied by gross domestic product of the rest of the world combined, has the most significant impact on real exports. The elasticity of real exports with respect to the real exchange rate was 2.34. However, the speed of adjustment towards long-run equilibrium was about 9% per year, which was rather slow. The low speed of adjustment implies it would take approximately 10 years for the full adjustment to take place and, thus, provides a novel explanation as to why the yen’s depreciation, triggered by Abenomics, did not boost Japanese exports as was expected by the Japanese government. Keywords Vector error correction model . Cointegration . Exports . Exchange rates . Japanese economy
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11293-02009675-1) contains supplementary material, which is available to authorized users.
* George K. Zestos [email protected]
1
Department of Economics, Christopher Newport University, 1 Avenue of the Arts, Newport News, VA 23606, USA
Jiang Y. et al.
JEL F01.F10.F15
Introduction Since Shinzo Abe took office as Prime Minister of Japan in December 2012, Japan has launched an unprecedented economic plan known as “Abenomics” to revive the stagnating economy, which has struggled with deflation for two decades. To achieve the two-percent inflation target, the Bank of Japan (BOJ) launched the Quantitative and Qualitative Monetary Easing (QQME)1 program on April 4, 2013. This unconventional monetary policy2 substantially contributed to the depreciation of the Japanese currency. The number of yen per U.S. dollar nominal exchange rate increased from 84 to 127 between 2012 to 2015. A cheaper yen was expected to restore Japanese international competitiveness, especially in relation to the South East Asian countries that
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