Impact of exchange rate shocks on Japanese exports: Quantitative assessment using a structural VAR model

Abstract

Experiences since the global recession in the late 2000s suggest that, although the fluctuations in the yen’s exchange rate have received considerable attention in the policy debate, global aggregate demand was largely responsible for the fluctuations in Japanese exports in this period. In this paper, we try to disentangle and evaluate the relative importance of the impact of the exchange rate shocks on Japanese exports and the impact of other structural economic shocks using a structural VAR model. First, assuming that there are two exogenous shocks, a global demand shock and an exchange rate-specific shock, we evaluate the relative importance of each shock to Japanese aggregate exports. Second, by extending the analytical framework of Kilian (2009), we analyze the impact of structural shocks associated with oil price fluctuations as additional sources of exogenous shocks because it is widely believed that oil prices play an important role in explaining Japan’s economic performance, and also the yen exchange rate. In the second half of the paper, the relative importance of structural economic shocks and exchange rate movements cannot be attributed to structural shocks in explaining Japanese exports during historic episodes of large exchange rate fluctuations are compared. We find that, while exchange rate shocks were important in explaining export changes in the 1980s, global demand shocks are more dominant in the 1990s and particularly in the 2000s. Oil market specific price shocks also have large impacts on Japanese exports in the 2000s.