Industry-specific Real Effective Exchange Rates and Export Price Competitiveness: The Cases of Japan, China, and Korea

Authors


  • This study is financially supported by the Research Institute of Economy, Trade and Industry (RIETI), the Center for Economic and Social Studies in Asia (CESSA) at Yokohama National University, and the JSPS (Japan Society for the Promotion of Science) Grant-in-Aid for Scientific Research (A) no. 24243041, (B) no. 24330101, and (C) no. 24530362. We wish to thank Takatoshi Ito, Eiji Ogawa, Naoyuki Yoshino, Kentaro Kawasaki, and Keiko Ito for their valuable comments on the earlier version of this paper. We would also like to thank AEPR Conference participants for their useful suggestions, especially Colin McKenzie, Shujiro Urata, Willem Thorbecke, Mohamed Ariff, Kyoji Fukao, and Takeo Hoshi.

Abstract

This paper constructs a new dataset of the industry-specific real effective exchange rate, based on the producer price indices, for Japan, China, and Korea on a monthly basis from January 2001 to February 2013 in order to provide a better indicator for export price competitiveness. By conducting simulation analysis, we found that Korean electrical machinery firms substantially improved their cost competitiveness by lowering their production costs during the Korean won appreciation period, while Japanese firms' large plant investment caused by management misjudgments led to excessive production capacity, which resulted in the deterioration of Japanese export competitiveness. A structural vector autoregression analysis also reveals that industry differences of cost competitiveness as well as nominal exchange rate changes have significant impact on export performances of Japan and Korea.

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