from Follow the Money

Yes Virginia, Exchange Rates Matter (The Case of Japan)

Last updated June 09, 2017

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U.S. Trade Deficit

Since the end of 2012, the yen has depreciated significantly and the dollar has appreciated significantly. Enough time has passed to look at how U.S. and Japanese exports have responded to these exchange rate moves. Both countries' exports are also shaped by global developments—the oil/commodity price shock of 2014 slowed emerging markets' import demand, for example. But there should still be information content in the relative performance of U.S. and Japanese exports.

Cumulative Contribution to GDP Growth From Exports

And guess what, exchange rates matter. Certainly the different trajectories of the dollar and yen would seem to provide the most straight-forward explanation for the relative performance of U.S. and Japanese exports (using the cumulative contribution of exports to real GDP growth as the measure of performance).*

United States: Exports vs. Real Effective Exchange Rate
Japan: Exports vs. Real Effective Exchange Rate

The same point holds for net exports—the overall trajectory of Japanese and U.S. imports has been remarkably similar, though I suspect for somewhat different reasons (Japanese import growth has been weak after 2014 because of weak consumption growth, U.S. import growth has been weak because of weak investment growth—and an inventory correction, though there are now signs U.S. import growth is picking up). Net exports clearly have helped Japan and hurt the U.S. over the past several years.

Cumulative Contribution to GDP Growth From Net Exports

If you step back a bit and plot the cumulative contribution of net exports to Japanese and U.S. growth since say the end of 2004 (there is no perfect starting point) there is a decent (inverse) correlation between cumulative growth in net exports and changes in the real effective exchange rate for both countries.   Note that for the U.S. the depreciation in 2003 likely had an impact on the size of change in real net exports after 2004 as well, given the lags.

United States: Net Exports vs. Real Effective Exchange Rate
Japan: Net Exports vs. Real Effective Exchange Rate

Net exports are once again up substantially since the end of 2004 for Japan (even with the need to substitute imported gas for nuclear power). And net exports are no longer up much for the U.S. since the end of 2004 (even with the dramatic reduction in U.S. net oil imports that resulted from the huge growth in U.S. production of light tight oil)

The exchange rate swings of the last five years have changed the picture dramatically relative to say 2012.   The positive impact of the dollar's 06 to 13 weakness is fading from the data.   And the contribution from real net exports to Japanese growth in the past four or so years looks increasingly similar to the contribution of real net exports to Japanese growth back in 05,06 and 07—another period of yen weakness.

The strong contribution to growth from net exports recently is one reason why Japan’s current account surplus is now running at close to 4 percent of its GDP ($184 billion in 2016).  The rise in Japan’s external surplus offset some of the 2016 fall in China’s current account surplus, keeping Asia's overall surplus up.

And I think there is growing evidence that the depreciation of the yuan in 2015 and 2016 is also starting to have an impact on global trade. In 2015 and 2016 I suspect China's export performance was slowed by the lagged impact of the yuan's appreciation in 2014 (the yuan followed the dollar up against a basket). But now the impact of the 2014 appreciation is fading, and the 2016 yuan depreciation is starting to show. China's May’s export volume growth looks to be around 8 percent—in line with the average for the first four months of the year (China only reports y/y changes in volumes, and the numbers are distorted by the new year, so there is no perfect method of getting the number). That is likely a bit faster than the roughly 4 percent y/y growth in global import demand in the IMF's forecast.    

My guess is that China’s export volume growth this year will exceed global export volume growth. As one would expect given the yuan’s depreciation since mid-2015. Exchange moves still tend to have predictable consequences.

Chinese import volume growth continues to be fairly strong (April was relatively, but May looks solid). But as China’s credit tightening starts to bite, I would not be surprised if China’s surplus also starts to rise—

* The q1 2013 jump in Japan's exports was matched by a parallel jump in Japan's imports.  The symmetrical revisions seem to reflect from a revision in the national income product accounts.  I did not revise the numbers to strip out the effect.  It has no impact on the trajectory of net exports.

 

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