Despite an appreciating yen, Japanese firms have managed to maintain strong export sales growth during the first half of the 1990s. Their strategies? Cutting the yen price of exports and shifting production to higher-value merchandise.Exports ; Japan ; Foreign exchange rates

Thomas Klitgaard

English

Research Papers in Economics

Coping with the Rising Yen: Japan’s Recent Export Experience
Thomas Klitgaard
Despite an appreciating yen, Japanese firms have managed to maintain strong export sales
growth during the first half of the 1990s. Their strategies? Cutting the yen price of exports
and shifting production to higher-value merchandise.
As the yen strengthened against the dollar in the first
half of the 1990s, many analysts expected that the
Japanese trade surplus, and the trade tensions accom-
panying it, would diminish. A rising yen, they rea-
soned, would make Japanese exports less affordable
abroad while making foreign goods more attractive to
Japanese consumers. Over time, the downward pres-
sure on the demand for Japan’s goods would lead to a
decline in the country’s trade surplus.
Contrary to expectations, however, Japan’s merchan-
dise trade surplus has shown few signs of shrinking. It
rose from $52 billion in 1990 to a record $121 billion
in 1994 and moderated only to $112 billion, at an
annual rate, over the first three quarters of 1995.
Although imports have helped bring the balance down,
rising very rapidly in response to sharply lower import
prices, this increase has not significantly narrowed the
surplus because export growth has remained high. The
surprising resilience of exports has prevented the
exchange rate shifts of the first half of the 1990s from
significantly reducing Japan’s trade surplus.
This edition of Current Issues examines how
Japanese exporters have been able to maintain much of
their foreign market share in the face of an appreciating
yen. One strategy has been to cut the yen price of
exports to reduce the impact of the yen’s rise on the for-
eign price of these goods. A second strategy has been to
shift production to high-value products. Because the
demand for such products tends to be less sensitive to
price increases, sales are partially insulated when the
yen appreciates. 
For the most part, these efforts have allowed
Japanese firms to enjoy strong export growth in the
1990s. The volume of exports has grown at an average
rate of 5 percent a year in the first half of the decade,
with producers of electrical machinery and chemicals
faring particularly well.1 This export performance has
roughly matched the export increases of Japan’s U.S.
competitors despite the yen’s rise.
Countering the Yen’s Rise     
The yen’s appreciation over the 1990s hurt the price
competitiveness of Japanese exports in foreign mar-
kets. For example, from 1990 through the first three
quarters of 1995, the value of the yen relative to the
dollar rose by almost 40 percent.2 In other words, if the
yen and dollar prices in the two countries had stayed
unchanged, Japanese products in 1995 would be
roughly 40 percent more expensive, compared with
U.S. goods, than they were in 1990. How then did
Japanese exporters respond to a development that could
have had disastrous consequences?  By slashing export
prices and shifting production to high-value goods.
January 1996 Volume 2  Number 1Lower Export Prices. Japanese firms sought to
counter the yen’s rise by cutting their export prices in
yen terms.3 Consequently, while U.S. export prices
climbed by 8 percent between 1990 and the first three
quarters of 1995, Japanese export prices in yen terms
dropped by more than 20 percent. Chart 1 conveys the
extent to which this strategy offset the yen’s apprecia-
tion.  The relative price of Japanese exports is calcu-
lated as the yen price of those exports converted by the
exchange rate into dollar terms divided by the price of
U.S. exports. This relative export price measure
declined by 15 percent from 1990 through the first
three quarters of 1995. In other words, the dollar price
of Japanese exports rose by 15 percent relative to the
price of U.S. exports. Although this increase is signifi-
cant, the loss of price competitiveness falls far short of
that implied by the 40 percent appreciation of the yen-
dollar exchange rate represented in Chart 1.
Industries differed in how dramatically they lowered
their export prices. From 1990 through the first three
quarters of 1995, the most significant price declines
occurred in electrical machinery (36 percent), chemi-
cals (28 percent), textiles (25 percent), and metals
(24 percent). More modest price cuts occurred in trans-
portation equipment (10 percent) and industrial
machinery (9 percent ).
Japanese firms were assisted in their efforts to lower
export prices by steep declines in the cost of imported
materials. Imported oil and materials are usually priced
in dollars, so a rise in the yen leads to a proportional
decline in the prices of these goods in yen terms.
Import prices fell by roughly 30 percent from 1990
through the first three quarters of 1995, and would
have fallen further had the dollar price for commodities
not jumped in recent years. The drop in import prices
was particularly useful to producers of textiles, chemi-
cals, and metals—goods that are relatively dependent
on imported materials.
Firms achieved the remaining reduction in export
prices by lowering wages, cutting profit margins, and
boosting productivity. These adjustments tend to be
painful, reflecting the cost of maintaining export sales
when the yen appreciates. Indeed, the stress placed on
wages, employment, and profits by firms trying to
maintain international competitiveness has worked to
restrain Japan’s economic growth during the 1990s.4
Significantly, the adjustments undertaken by
Japanese firms to lower export prices did not lead to
similarly sweeping declines in prices for goods sold on
the domestic market.5 Domestic prices for industrial
machinery and transportation equipment remained
essentially unchanged from 1990 through the first three
quarters of 1995, while prices for textiles, metals, and
chemicals all dropped in the range of 5 to 10 percent.
During the same period, domestic prices for electrical
machinery fell by 12 percent. These declines are much
more modest than the cuts in export prices. Even pro-
ducers of industrial machinery and transportation equip-
ment, who took the least aggressive steps to maintain
price competitiveness abroad, lowered their export prices
relative to the prices they offered domestic customers.
FRBNY 2
CURRENT ISSUES IN ECONOMICS AND FINANCE
Significantly, the adjustments
undertaken by Japanese firms to lower
export prices did not lead to similarly
sweeping declines in prices for 
goods sold on the domestic market.
Japanese firms sought to counter
the yen’s rise by cutting their export
prices in yen terms.One interpretation of the price data is that Japanese
consumers, by paying relatively high prices, indirectly
helped Japanese firms maintain export growth during
the yen’s rise. That is, the range of price cuts for
exports would have been much more limited had
Japanese firms been forced to offer matching cuts in
domestic prices.
The Shift to High-Value Products. To limit their
vulnerability to a rising yen, Japanese exporters also
shifted production from commodity-type goods to
high-value products.  The demand for commodities,
such as textiles and metals, is quite sensitive to price
changes because the goods themselves—whatever their
country of origin—are largely indistinguishable, except
by price. Customers, therefore, can easily switch to
non-Japanese suppliers when a rise in the yen pushes
the dollar price of Japanese exports higher. By contrast,
more sophisticated, high-value products are less sensi-
tive to price increases. For these goods, factors such as
embedded advanced technology, high-quality stan-
dards, and other nonprice characteristics work to offset
the impact on demand if prices are driven up by a
stronger yen.        
The shift to high-value products can be observed
indirectly by comparing the behavior of Japan’s two
export price indexes. One series, known as the unit
value index, is a crude measure of the average price
of exports, calculated by dividing the value of exports
by the number of items shipped. The other series is a
quality-adjusted, fixed-weight index that is part of
Japan’s wholesale price index. The two export price
measures diverge whenever the composition of exports
changes.  For example, suppose Japanese manufactur-
ers leave the price of all autos unchanged but decide to
ship more luxury cars and fewer economy cars. The
unit value series rises because the price of an exported
auto on average increases.  The fixed-weight index,
however, does not rise because the price of any particu-
lar auto is unchanged.
Starting in 1990, a large and widening gap devel-
oped between the two indexes, indicating a shift in the
composition of Japanese exports to high-value prod-
ucts. From 1990 through the first three quarters of
1995, the average price of exports dropped by 8 per-
cent, while the fixed-weight measure dropped by
22 percent (Chart 2).  The quality-adjusted price for a
fixed collection of goods fell sharply because Japanese
exporters were lowering prices to offset the yen’s rise.
Despite this decline, a move by Japanese firms in
recent years to ship more expensive items kept the
average price of exports from falling as steeply.6 So far,
the process has shown no signs of slowing: the gap
between the two export price series has widened each
year since 1990.
Chart 2 also offers insights into changes in firm
behavior over time. In particular, it appears that the
3
To limit their vulnerability to a rising yen,
Japanese exporters also shifted
production from commodity-type goods 
to high-value products.strategy of shifting to high-value products was not used
as aggressively in the 1980s. The yen rose sharply after
1985, yet the two price indexes tracked each other
closely, indicating that on average Japanese firms did
not significantly alter the composition of their exports
at that time to counter the yen’s rise.
Japanese Export Performance
The cut in yen export prices and the shift to high-value
products helped sustain Japanese export growth in the
1990s. Export volume grew at a 5 percent annual rate
from 1990 through the first three quarters of 1995.
However, the pattern of growth has not been uniform:
sales to Western Europe fell in the early 1990s and then
rose sharply in 1994-95. The European market is large
enough that the 10 percent drop in sales to that region
in 1993 had a substantial depressing impact on total
Japanese exports (Chart 3).  By the same token, the
recovery in sales to Western Europe in 1994-95 gave a
strong boost to total exports.   
Performance by Industry. The two industries that
most aggressively pursued the two strategies to offset
the yen’s rise—electrical machinery and chemicals—
saw their export volumes grow at an average rate of
11 percent from 1990 through the first three quarters of
1995 (see table).7 The other major industry groups saw
their exports grow at much slower rates. Those that
managed only modest shifts in production—metals and
textiles—grew at average annual rates of 4 percent and
0 percent, respectively.  Those that offered the smallest
price discounts—industrial machinery and transporta-
tion equipment—grew by 3 percent and fell by 2 per-
cent, respectively.8
Growth vis-à-vis the United States. Japanese
exporters have coped well enough with the rising yen to
match the performance of U.S. exporters in selling to
Asia and fall only slightly short of their U.S. competitors
in selling to Western Europe.  Asia has been a rapidly
expanding market, with the volume of exports from
Japan and the United States to that region rising at an
average rate of 11 percent per year from 1990 through
the first three quarters of 1995.9 Neither country enjoyed
much growth in its exports to Western Europe: from
1990 through the first three quarters of 1995, U.S.
exports increased at an average annual rate of 1 percent,
while Japan’s exports fell at an average annual rate of
1 percent.  However, a revival in Western European
demand beginning in 1994 generated a roughly equal
boost to both countries’exports to that region.
Conclusion 
Japanese exporters employed two strategies to cope
with the rising yen in the first half of the 1990s: they
cut yen export prices to minimize the changes in the
dollar price of their goods and they shifted production
to high-value products, which tend to be relatively less
sensitive to price increases than commodity-type prod-
ucts. These initiatives have largely enabled Japanese
firms to sustain export growth. The only significant
export weakness, in 1992-93, stemmed from a drop in
sales to Western Europe, but exports to that market
have since rebounded. One important indication of the
adaptability of Japanese exporters is that, despite the
yen’s appreciation, U.S. firms at best have made only
modest market share gains in Asia and Western Europe
at the expense of their Japanese competitors.    
The resilience of exports has kept Japan’s trade sur-
plus near its record high. Because exports far exceed
FRBNY 4
CURRENT ISSUES IN ECONOMICS AND FINANCE
Japanese Exports:  Developments from 1990-95:  I-III
Export
Export Volume Yen Export Composition
(annualized Price Shifta
percentage change) (percentage change) (index)
Industries
Textiles 0 -25 5
Chemicals 11 -28 17
Metals 4 -24 -1
Industrial 
machinery 3 -9 8
Electrical 
machinery 11 -36 29
Transportation 
equipment -2 -10 6
Aggregate exports 5 -22 14
Sources:  Bank of Japan, Economic Statistics Monthly; Japanese Tariff
Association, Summary Report on Trade of Japan.
aThis is an implied measure of the shift to high-value products derived
from the two available export price indexes. Specifically, the measure
equals the unit value index minus the fixed-weight, quality-adjusted
index in the Japanese wholesale price index. Larger values imply a
greater shift to exporting high-value products.
Japanese exporters have coped
well enough with the rising yen to match
the performance of U.S. exporters 
in selling to Asia and fall only
slightly short of  their  U.S. competitors
in selling to Western Europe.CURRENT ISSUES IN ECONOMICS AND FINANCE
imports, Japanese imports must grow significantly
faster than exports for the trade surplus to decline.
Recent history illustrates this point. In 1994, the dollar
value of Japanese exports grew by 10 percent while
imports grew by 14 percent, yet the surplus remained
unchanged at $120 billion. In the first three quarters of
1995, the surplus dropped only modestly, to $112 bil-
lion, even though imports surged by 25 percent over
year-ago levels.  It was the strength of exports, up
15 percent over this period, that prevented the surplus
from shrinking more dramatically. These examples
show that Japan will find it difficult to reduce its trade
surplus significantly as long as Japanese firms can
sustain export sales by pursuing strategies that offset
the strong yen. 
Notes
1. Export volumes are calculated by dividing nominal yen exports,
on a customs clearance basis, by the corresponding export price
component of the wholesale price index. In dollar terms, total
Japanese exports grew at an average annual rate of 9 percent from
1990 through the first three quarters of 1995. 
2. In 1990, the dollar was equivalent to 138 yen. During the first
three quarters of 1995, it averaged 92 yen. 
3. Mann (1986) and Krugman (1987) were among the first to study
reports that exporters cut prices to maintain foreign sales. Recent
work includes Gagnon and Knetter (1995). 
4. The profit-to-sales ratio for manufacturing firms fell from 5.2 in
fiscal 1990 to 2.8 in fiscal 1994. The unemployment rate in Japan
rose from 2.1 percent in 1990 to 3.2 percent in the third quarter of
1995.
5. Past empirical studies have found that Japanese firms vary their
export prices relative to their domestic prices when the yen
exchange rate changes. See Marston (1990) and Lowell and Yager
(1993).
FRBNY 5
6. One example is the shift to luxury cars. Nissan and Toyota intro-
duced their Lexus and Infiniti lines, respectively, in 1989. The cars
currently equal 25 percent of the autos exported to the United
States by both companies.
7. Most Japanese exports fall into three categories: electrical
machinery (25 percent of exports in 1994), industrial machinery
(24 percent), and transportation equipment (23 percent). The other
major categories are chemicals (6 percent), metals (6 percent), and
textiles (2 percent).  Miscellaneous products make up the remaining
14 percent of Japanese exports. 
8. Export sales of transportation equipment have been restrained by
the increased production of Japanese automotive plants operating in
North America and Europe. For example, the number of automo-
biles produced by Japanese plants operating in the United States
increased by 33 percent from 1990-94.
9. U.S. export volumes are calculated by dividing nominal dollar
exports, on a census basis, by the export price index compiled by
the Bureau of Labor Statistics. 
References
Gagnon, Joseph, and Michael Knetter. 1995. “Markup Adjustment
and Exchange Rate Fluctuations: Evidence from Panel Data on
Automobile Exports.” Journal of International Money and Finance  14,
no. 2: 289-310.
Krugman, Paul. 1987. “Pricing to Market When the Exchange Rate
Changes.” S.W. Arndt and J.D. Richardson, eds., Real-Financial
Linkages Among Open Economies. Cambridge: MIT Press.
Lowell, Julia, and Loren Yager. 1993. “Pricing and Markets: U.S.
and Japanese Responses to Currency Fluctuation.” Center for Asia-
Pacific Policy, RAND Working Paper.
Mann, Catherine. 1986. “Prices, Profit Margins, and Exchange
Rates.” Federal Reserve Bulletin 72: 366-79 (June). 
Marston, Richard. 1990. “Pricing to Market in Japanese Manufac-
turing.”  Journal of International Economics 29: 217-36
(November). 
The views expressed in this article are those of the author and do not necessarily reflect the position of
the Federal Reserve Bank of New York or the Federal Reserve System.
About the Author
Thomas Klitgaard is a Senior Economist in the International Macroeconomics Function of the Research
and Market Analysis Group. CURRENT ISSUES IN ECONOMICS AND FINANCE
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About the Author Thomas Klitgaard is a Senior Economist

Markup Adjustment and Exchange Rate Fluctuations: Evidence from Panel Data on Automobile Exports.”

Pricing and Markets: U.S. and Japanese Responses to Currency Fluctuation.” Center for AsiaPacific Policy, RAND Working Paper.

Pricing to Market in Japanese Manufacturing.”

Pricing to Market When the Exchange Rate Changes.”

Coping with the rising yen: Japan's recent export experience

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Coping with the rising yen: Japan's recent export experience

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