On the changing international competitiveness of Japanese manufacturing since 1985

Abstract

This paper considers the issue of international com petitiveness and the so-called 'hollowing out' of Japan' s manufacturing industries in the period since the Plaza Accord in 1985. It is often argued that hollowing out can be caused by two different eco nomic mechanisms. One is the strong yen, which reduces net exports, while the other is the move by Japanese manufacturing companies to overseas production, which substitutes for exports and en courages imports of products made by their affili ates abroad. This conventional view may be correct if either yen appreciation or increased overseas production are independent causes of hollowing out. However, if yen appreciation is the main reason behind increased overseas production, the latter would not be an additional factor in the hollowing out. In order to see whether overseas production leads to hollowing out independently of yen appre ciation, we need to investigate the motivation of Japanese manufacturing corporations which choose to shift their activities abroad. Furthermore, it is necessary to distinguish the hollowing out of Japa nese manufacturing from the dynamic evolution of the country' s trading structure, which should inevi tably lead to some industries losing their compara tive advantage.