Should Korea Worry about a Permanently Weak Yen?

Abstract

Three years have passed since the Bank of Japan's asset purchase program was introduced in 2011, causing a sharp decline in the value of the Japanese Yen. What would be the implications for Japan and Korea's exporters if the weak Yen is here to stay? We explore this question by examining exporters' pricing behaviors and volume responses to exchange rate shocks. We find that if the weak Yen persists, it would strengthen Japan's price competitiveness over time as export prices respond with a lag. We also find that while direct boosts to export demand will be rather limited, a persistently weaker Yen would expand the Japanese exporters' profits lastingly, which could reinvigorate the ability, particularly of flagship exporting firms, to compete and grow in the global market over time. These findings suggest that the muted price and volume response so far to the sustained weakness of the Yen may mask a more fundamental shift in the relative competitiveness of Japanese and Korean exporters.

Global value chains and the exchange rate elasticity of exports

“…For robustness, we also estimate regressions with smaller (5 and 6 years) and larger (8 years) windows and find similar results.12 Ree, Hong and Choi (2015) show that the muted price and volume response of Japanese exports to the sustained weakness of the Yen may mask an expansion of the Japanese exporters' profits.…”

Global Value Chains and the Exchange Rate Elasticity of Exports

“…For robustness, we also estimate regressions with smaller (5 and 6 years) and larger (8 years) windows and find similar results.12 Ree, Hong and Choi (2015) show that the muted price and volume response of Japanese exports to the sustained weakness of the Yen may mask an expansion of the Japanese exporters' profits.©International Monetary Fund. Not for Redistribution…”

Spillovers from Japan's Unconventional Monetary Policy to Emerging Asia: a Global VAR approach

“…Joo, Kee and Choi (2014) examine the effects of QQE on Korea and find that there was little impact on trade and capital flows. Ree, Hong and Choi (2015) find that the depreciation of the Japanese Yen could increase Japan's price competitiveness in the long-run, and may be detrimental to South Korean companies in case of an appreciation of the Won. The 2015 Asia and Pacific IMF Regional Economic Outlook highlights the appreciation of currencies of several countries in Asia due to changes in monetary policies in Japan, Europe and the United States.…”