The Contribution of the Yen Appreciation since 2007 to the Japanese Economic Debacle

The Japanese yen in 2012 remains 25 percent above its value in 2007. Exports, industrial production, and stock prices crashed after 2007 and have yet to regain their pre-crash values. 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 percent appreciation reduces long run exports by 8 – 18 percent. 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 percent in the automobile sector and 22 percent in the electrical and electronics sector. Finally, evidence from estimating exchange rate exposures indicates that the yen appreciation has reduced profitability significantly in the automobile and electronics sectors. Japanese firms could mitigate some of these harmful effects by focusing on innovating rather than competing based on price in commoditized industries.