Industry‐specific Exchange Rate Fluctuations, Japanese Exports and Financial Constraints: Evidence from Panel Vector Autoregressive Analysis

• Author: Shajuan Zhang
• DOI: http://doi.org/10.1111/asej.12145
• Date: 01 June 2018
• Published date: 01 June 2018

Industry-specific Exchange Rate Fluctuations,

Japanese Exports and Financial Constraints:

Evidence from Panel Vector Autoregressive

Analysis*

Shajuan Zhang

Received 1 August 2016; Accepted 13 February 2018

Using a panelvector autoregression approach and industrybreakdown data for finan-

cial constraints obtained from the Bank of Japan’sTank an (Short-Term Economic

Survey of Enterprises in Japan) database,this study empirically investigates whether

and how Japanese firms’financial constraints (internal and external) influence the

response of Japanese sectoral exports to an exchange rate shock. Furthermore, we

use the industry-specific real effective exchange ratedata developed by to allow for

differentmovements of real effective exchangerates across industries.It is found that

financial constraints have a significant influence on Japanese exports in response to

exchange rate shocks. Japanese exporters with either lower internal financial con-

straints or externalfinancial constraints are less affected by the yen’s appreciation. In

addition, if firms face high external financial constraints, only reducing the internal

financial constraints cannot help them mitigate the impact of the yen’s appreciation

on their exports.Thus, an accommodativefinancial environment alsoplays an impor-

tant role in alleviating the impact thatthe yen’s appreciation has on Japaneseexports.

Keywords: financial constraints, industry-specific real effective exchange rate,

Japanese exports, panel vector autoregression.

JEL classification codes: F31, F33, F15.

doi: 10.1111/asej.12145

I. Introduction

Financial constraints can play a crucial role in firms’export performance; how-

ever, only a few studies have so far investigated how financial constraints affect

the impact that exchange rate fluctuations have on exports.

1

Dekle and Ryoo

*Zhang: Faculty of Business Administration, Toyo University, 5-28-20, Hakusan, Bunkyo-ku,

Tokyo 112-8606, Japan. Email: zhang085@toyo.jp. The earlier version of this paper was presented

at the 14th International Convention on the East Asian Economic Association (EAEA14) in Bang-

kok, Thailand, November 1-2, 2014, and also at the RIETI-IWEP-CESSA Joint-Workshop in Bei-

jing, China, December 12-14, 2014. The author is grateful for helpful comments and suggestions by

Kiyotaka Sato, Eiji Ogawa, Junko Shimizu, Kentaro Kawasaki, Taiyo Yoshimi, Willem Thorbecke,

Qiyuan Xu, Jianwei Xu, Xiaoqin Li, and conference and workshop participants. The author would

also appreciate the financial support of the JSPS (Japan Society for the Promotion of Science) Grant-

in-Aid for Scientific Research (B) No. 24330101 and Yokohama National University.

1 See, among others, Amiti and Weinstein (2011) and Manova (2012).

© 2018 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2018, Vol.32 No. 2, 125–145 125

(2002) built a theoretical model and presented empirical results using Japanese

firm-level data from 1982 to 1997.

2

They found that keiretsu firms, which can

be characterized as having fewer financial constraints due to their strong rela-

tionship with banks, were less responsive to exchange rate fluctuations than

non-keiretsu firms. This finding suggests that firms or industries that are less

financially constrained tend to have lower exchange rate elasticities of exports.

Strasser (2013) notes that the degree of exchange-rate pass-through for finan-

cially constrained firms is almost twice as high as that for unconstrained firms.

Moreover, the export volumes of firms with financial constraints are approxi-

mately twice as sensitive to exchange rate fluctuations as those of firms without

financial constraints. Although interesting findings, these studies basically focus

on the banks’lending attitudes, which can be characterized as external financial

constraints. In the context of Japanese exporting firms, however, it is more

important to consider the internal as well as external financial constraints.

Figure 1 indicates how the two types of financial constraints have changed

from 2001 to 2013: one concerns the lending attitude of Japanese financial insti-

tutions (a measure of external financial constraints) and the other is the liquidity

ratio of Japanese firms (a measure of internal financial constraints). In Japan,

banks’lending attitudes exhibited large fluctuations from 2002 to 2003 and

again from 2009 to 2010 when Japanese firms faced severe external financial

constraints. Furthermore, the lending attitudes tended to fluctuate at a relatively

low level (severe lending attitude) after the collapse of Lehman Brothers. By

contrast, firms had very high liquidity ratios during the post-crisis period, which

indicates that Japanese firms on average had ample internal funds. The degree

of external and internal financial constraints may each differ across industries.

Thus, it is interesting to examine how and to what extent financial constraints

influence the response of Japanese exports to exchange rate shocks and whether

the response varies for firms’different levels of financial constraints.

The present paper differs from existing studies in three respects. First, in con-

trast to previous studies, the effects of both external and internal financial con-

straints are empirically investigated for the first time. By fully utilizing financial

data from the Tankan (Short-Term Economic Survey of Enterprises in Japan)

database published by the Bank of Japan (BOJ), the effects that external and

internal financial constraints have upon the relationship between exchange rate

fluctuations and Japanese exports are separately and jointly estimated. Second,

this study uses a novel approach by focusing on differences in the dynamic

effect of exchange rate shocks on exports when exporters face various levels of

2 Given inadequate data on financial constraints, they conducted two empirical strategies to inves-

tigate the role of such constraints on exchange rate elasticities of exports: First, they compared the

export elasticities of non-keiretsu firms with those of keiretsu firms, which can be characterized as

having fewer financial constraints due to their strong relationship with banks. Furthermore, they com-

pared actual export elasticities with hypothetical export elasticities under the assumption that a firm

hedges completely (fewer financial constraints).

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