An Empirical Analysis on Japanese Import Demand Function in Comparison with Korea’s Import Demand

Abstract

Purpose - This study presents an empirical examination of Japan’s short-run and long-run aggregate demand for imports, compared with the study on Korea’s import, using quarterly economic data for the period 2000-2020 including aggregate imports, final consumption expenditure components, investment and relative price of imports. Design/Methodology/Approach - This paper has employed multivariate co-integration procedure and the short-run error correction model to find the existence of a cointegration and the relationship among variables in import demand function. Findings - This paper shows that the variables are all cointegrated and there exist significant differences with reference to different factors of final expenditure. Partial elasticities with respect to government expenditure, investment, exports and import prices are reported to be positive while imports seem to move negatively to changes in private consumption, in contrast to the case of Korea which shows that imports only move negatively with respect to investment. Export appears to indicate a relatively insignificant impact on Japan’s aggregate imports in the long run. However, an vector error correction model demonstrates that only exports have an influence on the imports in the short run while, in Korea, the current period changes in the demand for imports are related only to the previous period changes in relative price of imports. Research Implications - This paper provides significant implications for policy makers in a nation seeking to improve the country’s trade balances. Exchange rate policies in Japan appear to have significant long-term impact on Japan’s import demand, but no significant effect in the short term. Policies to increase the private sector consumption could be of a crucial importance in decreasing aggregate imports in the long term, resulting in further improvement in Japan’s balance of trade. In contrast to Japan, the exchange rate scheme has a short-term effect on Korea’s demand for imports but not a long-term impact on the country’s imports while investment component plays a key role in reducing imports in the long run, leading to enhancement in the Korea’s balance of trade.