Exchange Rates and Profit Margins: The Case of Japanese Exporters

[...]This article examines how Japanese exporters areresponding to the conflicting objectives of maintainingstable profit margins and stable export sales when the valueof the yen fluctuates. We find that Japanese firms tend tostrike a balance between these goals. The firms’ foreigncustomers do see exchange-rate-driven changes in prices,but the firms moderate the extent of these changes byaltering their profit margins. For Japanese exporters producingindustrial machinery, electrical machinery, andtransportation equipment, our analysis suggests that a10 percent rise in the yen leads to a roughly 4 percentdecline in export margins (relative to the margins on goodssold in Japan) when other factors are held constant. Thatis, exporters in these industries pass on more than half ofany change in the yen to the price seen by their foreigncustomers and absorb the remainder by adjusting profitmargins on their foreign sales.[...]