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The Japan-U.S. Exchange Rate, Productivity, and the Competitiveness of Japanese Industries

Author

Listed:
  • Dekle, Robert
  • Fukao, Kyoji
  • 深尾, 京司
  • フカオ, キョウジ
Abstract
In this paper, we focus on the movements of the yen on Japanese industries, and on the sectoral reallocation of Japanese employment. We show that the appreciation episodes of 1985 and 1995 have significantly hurt the ability of Japanese industries to compete with U.S. industries, by raising the relative production costs of Japanese industries. This relative cost gap with U.S. industries narrowed from 1995, owing to faster wage growth in the U.S., and especially to higher productivity growth in some Japanese industries. In fact, in these high productivity Japanese manufacturing industries such as chemicals and transport equipment, relative production costs were essentially back to pre-1985, pre-Plaza Accord levels by 2004. In contrast, the relative production costs of Japanese low productivity manufacturing industries such as textiles and wood products have remained high. Clearly, in the aggregate, the appreciation of the yen was not matched by an increase in Japanese productivity. What then is the appreciation of the aggregate real exchange rate consistent with these Japan-U.S. differences in industrial productivities? To answer this question, we build a three-sector (high productivity manufacturing, low productivity manufacturing, and services) equilibrium macroeconomic-trade model of Japan and the U.S. We find that while the yen was "undervalued" before 1985, it was significantly "overvalued" after 1985, and especially since 1995. In our model simulations, the Balassa-Samuelson effect is observed: the equilibrium real exchange rate is appreciating over time, owing to strong relative growth in the Japanese high productivity manufacturing sector, but very poor relative productivity growth in the Japanese services sector. Interestingly, the continued appreciation of the equilibrium real exchange rate meant that the actual real exchange rate was near its equilibrium value by 2003-2004, when the nominal yen dollar rate was about 120 yen to the dollar.

Suggested Citation

  • Dekle, Robert & Fukao, Kyoji & 深尾, 京司 & フカオ, キョウジ, 2009. "The Japan-U.S. Exchange Rate, Productivity, and the Competitiveness of Japanese Industries," CEI Working Paper Series 2008-25, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2008-25
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/29300/WP2008-25.pdf
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    References listed on IDEAS

    as
    1. Marcel P. Timmer & Mary O’Mahony & Bart van Ark, 2007. "EU KLEMS Growth and Productivity Accounts: An Overview," International Productivity Monitor, Centre for the Study of Living Standards, vol. 14, pages 71-85, Spring.
    2. FUKAO Kyoji & HAMAGATA Sumio & INUI Tomohiko & ITO Keiko & Hyeog Ug KWON & MAKINO Tatsuji & MIYAGAWA Tsutomu & NAKANISHI Yasuo & TOKUI Joji, 2007. "Estimation Procedures and TFP Analysis of the JIP Database 2006 Provisional Version," Discussion papers 07003, Research Institute of Economy, Trade and Industry (RIETI).
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    Cited by:

    1. Ansgar Belke & Ulrich Volz, 2020. "The Yen Exchange Rate and the Hollowing Out of the Japanese Industry," Open Economies Review, Springer, vol. 31(2), pages 371-406, April.
    2. Keiko Ito & Junko Shimizu, 2015. "Industry-Level Competitiveness, Productivity and Effective Exchange Rates in East Asia," Asian Economic Journal, East Asian Economic Association, vol. 29(2), pages 181-214, June.
    3. repec:ecb:ecbwps:20141801 is not listed on IDEAS
    4. Robert Dekle, 2013. "Real Exchange Rates in a Model of Structural Change: Applications to the Real Yen-Dollar and Chinese RMB-Dollar Exchange Rates," IMES Discussion Paper Series 13-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
    5. KIYOTA Kozo & KUROKAWA Yoshinori, 2017. "Factor Intensity Reversals Redux," Discussion papers 17021, Research Institute of Economy, Trade and Industry (RIETI).
    6. Calin-Vlad Demian & Filippo di Mauro, 2018. "The exchange rate, asymmetric shocks and asymmetric distributions," International Economics, CEPII research center, issue 154, pages 68-85.
    7. Kiyotaka Sato & Junko Shimizu & Nagendra Shrestha & Zhaoyong Zhang, 2012. "New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi," The World Economy, Wiley Blackwell, vol. 35(4), pages 419-443, April.

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