Abstract
Since the demise of the Bretton Woods system, the yen has seen several episodes of strong appreciation, including in the late 1970s, after the 1985 Plaza Agreement, the early and late 1990s and after 2008. These appreciations have not only been associated with “expensive yen recessions” resulting from negative effects on exports; since the late 1980s, the strong yen has also raised concerns about a de-industrialisation of the Japanese economy. Against this backdrop, the article investigates the effects of changes to the yen exchange rate on the hollowing out of the Japanese industrial sector. To this end, the article uses both aggregate and industry-specific data to gauge the effects of yen fluctuations on the output and exports of different Japanese industries, exploiting new data for industry-specific real effective exchange rates. Our findings support the view that the periods of yen appreciation had more than just transitory effects on Japanese manufacturing. The results also provide indication of hysteresis effects on manufacturing. While there are certainly also other factors that have contributed to a hollowing out of Japanese industry, a strong yen played a role, too.
Highlights
A strong yen – endaka (円高) in Japanese – has repeatedly caused distress among Japanese policymakers and manufacturers
Our results suggest that a strong yen had more than just transitory effects on Japanese manufacturing employment and output
In our annual data analysis, the Dynamic Ordinary Least Squares (DOLS) and Autoregressive Distributed Lag (ARDL) estimations provide robust results which indicate that appreciations of the real effective yen exchange rate did have significant negative effects on the share of manufacturing in total employment in Japan
Summary
A strong yen – endaka (円高) in Japanese – has repeatedly caused distress among Japanese policymakers and manufacturers. Extended author information available on the last page of the article system in 1971, the yen has seen several episodes of strong appreciation, including in the late 1970s, after the 1985 Plaza Agreement, the early and late 1990s and after 2008 (Fig. 1). These appreciations have been associated with “expensive yen recessions” – endaka fukyo (円高不況) in Japanese – resulting from negative effects on exports; since the late 1980s, the strong yen has raised concern about a deindustrialisation of the Japanese economy. Exchange rate effects on manufacturing may have been more pronounced than elsewhere
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