Why yen appreciated

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Join over , Finance professionals who already subscribe to the FT. Choose your subscription. Trial Try full digital access and see why over 1 million readers subscribe to the FT. Hence, a period of political tension surrounding trade emerged, where new barriers to Japanese exports arose, such as voluntary quotas on automobiles and limits on exports to the United States for sale. Japanese companies now had two good reasons to build factories overseas. It would it lead to more stable profitability in the face of an unstable exchange rate, and relieve the increasing cost of labor.

Toyota is a classic example. The slide below is from Toyota's FY annual results presentation. It details the split between a how many cars the company produces in Japan and overseas, and b how much revenue it generates in Japan and overseas.

First, the data show that the vast majority of the company's revenues now come from outside of Japan. But we also note that the majority of cars it builds are manufactured overseas.

While the company may still be a net exporter , and while the evolution may have happened over an extended period, the graduation to a focus on overseas production is clear. Source: Toyota, Not all manufacturers in Japan are large exporters, and not all exporters in Japan have been as aggressive as Toyota and the auto industry in moving production overseas.

However, it has been a trend for most of the last three decades. The chart below combines data from two government agencies to illustrate this point. It looks at the revenues from overseas subsidiaries of Japanese manufacturers and divides it by total revenues of those same companies for the years to In other words, more and more Japanese manufacturers were seeing the merit of expanding their businesses overseas and making products where they sold them.

The problem with this model, however, was that it hollowed out the Japanese economy. As factories moved abroad, fewer jobs were available domestically in Japan, which placed downward pressure on wages and damaged the domestic economy. Even non-manufacturers felt the impact as consumers reined in spending.

The exchange rate factors heavily into discussions on energy security because the country is devoid of natural resources such as oil. Anything that the country cannot produce through renewable sources such as hydro, solar, and nuclear energy must be imported.

Even after the triple disaster of the massive earthquake, tsunami and nuclear meltdown that occurred in March , the country's government and manufacturers were keen to have the nuclear reactors back in operation. While the government's quantitative easing program has been successful at weakening the yen since , the flip side is that imports cost more as a result of that weakening. The strengthening of the yen against the dollar after the Plaza Accord and the exchange rate volatility that followed has encouraged a rebalancing of Japan's manufacturing industry from one focused on domestic production and export to one where production has shifted overseas on a large scale.

This has had consequences for domestic employment and consumption, and even non-manufacturers and solely domestic companies are exposed. While the companies themselves have become more stable because they are less exposed to the negative effects of exchange rate movements, the future stability of the domestic economy is less certain.

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Provided by the Springer Nature SharedIt content-sharing initiative. Skip to main content. Search SpringerLink Search. Download PDF. Abstract Since the demise of the Bretton Woods system, the yen has seen several episodes of strong appreciation, including in the late s, after the Plaza Agreement, the early and late s and after Full size image.

Literature Review It is well established that depreciated real exchange rates can help to stimulate industrial development and economic growth Rodrik Footnote 4 A string of studies examines the role of Japanese outward direct investment in the hollowing out process. Empirical Approach and Findings For our econometric analysis, we use both aggregate and industry-specific data to gauge the effects of changes of the real effective yen exchange rate.

Variables for analysis with annual data. Table 2 Dynamic least squares estimation for fully specified model Full size table. Table 3 Dynamic least squares estimation for model excluding Chinese exports Full size table.

Residuals, actual and fitted values fully specified DOLS model. Real effective exchange rates for different industrial sectors. Table 7 Impact of the real effective yen exchange rate on Japanese industrial production — A survey of estimated sector-specific ARDL models excluding exports Full size table. Table 8 Impact of the real effective yen exchange rate on Japanese manufacturing industrial production — an estimated ARDL model Full size table.

Table 9 Ordinary Pearson correlations —the Japanese manufacturing sector Full size table. Table 10 Impact of the real effective yen exchange rate on Japanese industrial production — a survey of estimated sector-specific ARDL models including exports Full size table.

Table 11 Sectoral industrial production in Japan — determinants according to a Pooled Least Squares panel model Full size table. Conclusions In this article we have investigated the role of the yen exchange rate in the de-industrialisation that has taken place in Japan over recent decades. Notes 1. Camb J Econ 28 5 — Google Scholar Rowthorn R, Coutts K De-industrialisation and the balance of payments in advanced economies, Centre for business research working paper no.

Econometrica 61 4 — Google Scholar Takagi S Foreign exchange market intervention and domestic monetary control in Japan, — View author publications. Appendix Appendix Table 14 Variables and sources for analysis with annual data, — Full size table. Table 15 Variables and sources for analysis with monthly data, — Full size table. Table 16 Industry classifications Full size table. About this article.