JEI's Spin on the News


Friday, May 21, 1999

One of the nagging questions regarding the behavior of Japanese exporters has been their response to fluctuations in the value of the yen. A new study by an economist at the Federal Reserve Bank of New York has confirmed the conventional wisdom that Japanese companies shave profit margins when the yen appreciates but also demonstrates that the firms increase margins when the Japanese currency drops.

The results obtained by Thomas Klitgaard, found online at

not only provide insight into the competitive strategies of Japanese companies but also carry lessons for U.S. policymakers and rivals of Japanese exporters.

Year in and year out, American officials argue that Japan has to "do more" to stimulate its economy. That stimulation theoretically helps American and other firms through two channels. The argument is that not only do sales of everything (including imports) go up simply because the economy grows, the increased demand for capital in Japan lifts interest rates, other factors equal, and induces funds to stay at home. That, in turn, increases the demand for yen relative to its supply on currency markets, lifting its value. An appreciated yen makes foreign goods more competitive in Japan and Japanese exports less competitive abroad.

The relevant part of this process for Mr. Klitgaard is the impact of yen appreciation on the competitiveness of exports. He finds that a 10 percent rise in the yen leads to a 4 percent reduction in export relative to domestic margins. In other words, Japanese companies absorb some of the implied price increase. This finding, of much less than complete "pass-through" is consistent with more than a decade of studies, as detailed in a JEI Report in the early 1990s (JEI Report No. 43A, November 15, 1991). In this respect, Japanese exporters are distinctive in comparison with companies in other industrial countries.

The study raises the possibility that American companies, which long have complained that their Japanese counterparts do not play by the rules, have maybe half a point. Japanese exporters do respond differently, but this difference does not necessarily imply that they are unfair. One possibility is that they are forced to act this way to match rivals in competitive markets. Under perfect competition, no firm can raise prices independently except at the cost of losing its entire market. Moreover, just because Japanese firms do not raise prices as much as might be expected in response to a run-up of the yen does not mean they suffer no competitive damage — or confer no competitive advantages on their rivals — in response to exchange rates. They may market their products less aggressively, precisely because they have held the line on price.

One lesson for American policymakers and companies alike is "do not given up on exchange rates so easily." The fact that Japanese companies do not price as expected does not mean that the exchange rate has no impact. American rivals should do better response to yen appreciation and be held accountable if they do not.

Mr. Klitgaard's finding that export price reductions are modest in response to yen depreciation is a more novel finding, but even more important should the yen continue to weaken this year. In coming months, Japanese exporters may not cut prices as much as one might expect, but that will not mean that they are not becoming fiercer rivals.

JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.

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