The contribution of the yen appreciation since 2007 to the Japanese economic debacle

Abstract

The Japanese yen in 2012 remained 25% above its value in 2007. Exports, industrial production, and stock prices crashed after 2007 and had yet to regain their pre-crash values five years later. This paper investigates the contribution of the yen appreciation to this economic disaster. Evidence from Johansen maximum likelihood and dynamic ordinary least squares (DOLS) estimation indicates that a 25% appreciation reduces long run exports by 8–18%. Panel DOLS evidence reveals that the appreciation especially depressed exports in the automobile sector. Regression evidence implies that the yen appreciation caused yen export prices to fall 29% in the automobile sector and 22% in the electrical and electronics sector. Finally, evidence from estimating exchange rate exposures indicates that the yen appreciation reduced stock prices significantly in the automobile and electronics sectors.