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U. S.-Japanese Bilateral Trade and the Yen-Dollar Exchange Rate: An Empirical Analysis

1986; Wiley; Volume: 52; Issue: 4 Linguagem: Inglês

10.2307/1059154

2325-8012

Stephen E. Haynes, Michael M. Hutchison, Raymond F. Mikesell,

Monetary Policy and Economic Impact

The United States has recently experienced unprecedented balance of trade deficits. The merchandise trade deficit reached an all-time high of over $61 billion in 1983, and for 1984 was $108 billion. Japan is often singled out as the major contributor to this deficit. In 1984, roughly one-third of the U.S. merchandise trade deficit and over one-half of the U.S. manufacturing trade deficit was with Japan. Moreover, since shifts in trade balances are widely regarded as a function of changes in exchange rates, there has been a tendency to focus on the general depreciation of the yen in terms of the dollar which began in 1978 in explaining the U.S. trade deficit. This paper explores empirically the response of the U.S.-Japanese trade balance in manufacturing to movements in the yen-dollar rate. The analysis, based on both structural and reduced form approaches, provides a test of the conventional view that the weak yen has been a major factor explaining the Japanese penetration into the U.S. manufacturing sector, while Japanese protectionism has effectively insulated Japan's markets from U.S. competition. Our analysis does not support this view. We find U.S. imports from Japan essentially insensitive to exchange rate movements, but U.S. exports to Japan highly exchange rate elastic. Since U.S. manufacturing imports from Japan dominate corresponding exports ($58 billion to $8 billion in 1984), we conclude that even a sustained appreciation of the yen in terms of the dollar is unlikely to reduce significantly the U.S. manufacturing trade deficit. In section II of this paper we specify structural and reduced-form models explaining U.S. bilateral manufacturing trade with Japan. In section III we present and evaluate struc-