Impacts of Exchange Rate on Vietnam-Japan Trade Balance: A Nonlinear Asymmetric Cointegration Approach

The paper examines the impacts of exchange rate on Vietnam’s trade balance with Japan based on the employment of industry-level data in a set of linear and nonlinear auto-regressive distributed lag models. Results from the models indicate a degree of bias in regression when using aggregate data and a linear ARDL approach. Among 19 industries under consideration, the NARDL model presents different responses from 16 industries, which account for 40% of imports and 60% of exports between Vietnam and Japan, to exchange rate movements. The trade balance of each industry responds differently towards exchange rate and asymmetric reactions are found in 9 out of 16 industries affected by changes in exchange rate. The model using aggregate data shows that exchange rate positively affects Vietnam-Japan trade balance in case of currency depreciation, whereas currency appreciation has no impact on the trade balance between the two countries. Besides, results of the model using aggregate data reveal that the level of economic activity of Japan exerts positive impacts on Vietnam’s trade balance with Japan.