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This is a revised and updated version of a paper that originally appeared as Annex II to Japan—The Recent Past and Longer-Term Prospects (SM/91/135). The author thanks Ulrich Baumgartner, Dan Citrin, and Jorge Márquez-Ruarte for helpful comments, and Roseanne Heller for editorial assistance.
It should be noted that there is some overlap in the coverage of the surveys by Goldstein and Khan (1985) and Chouraqui and others (1988). The summary measures from these studies reflect unweighted averages of the correctly-signed coefficients.
This is consistent with the relatively high share of raw materials in Japan’s imports, the demand for which tends to be both less price and income elastic than the demand for manufactures.
Purchases of overseas gold for investment purposes have been treated as merchandise imports in the Japanese balance of payments data, in spite of the fact that the gold is not shipped across borders. No official data are available on these transactions: their magnitude has been estimated by comparing movements in merchandise imports on a customs-clearance basis (which exclude gold investment transactions) to those on a balance of payments basis.
Time trends were included to capture the possible effect of different rates of productivity growth in traded-goods industries compared with the economy as a whole.
This condition is only holds exactly when trade is initially balanced. The role of relative price movements in reducing the Japanese trade surplus in the post-1985 period is discussed in detail in the next section.
Domestic wholesale prices were expressed in U.S. dollars. The equation was also estimated with wholesale prices expressed in terms of yen and the yen/dollar exchange rate entered separately. The two variables had very similar coefficients, and formal tests indicated that the constraint that they were identical could not be rejected.
This test is a modified version of that originally proposed by Chow (1960) because there are sufficient degrees of freedom to run the regression over both sub-sample periods. This eliminates the sensitivity of the conventional Chow test to the assumption of homoscedasticity of the disturbance term between the two sample periods.
The predictions for trade volumes have been constructed using actual export and import prices, as opposed to the fitted values from the price equations. The errors then reflect shocks specific to the volume equations.
Changes in the GDP of trading partners were scaled by the demand elasticity of 1.5 used to construct the long-run predicted series.
Current account balance excluding transfers, factor services, and estimated gold transactions for investment purposes.
The unitary price elasticity for exports implies that their value expressed in foreign currency would be unchanged in the long run, while their share in GDP would fall by 10 percent—to about 13 1/4 percent of GDP—because of the rise in the foreign-currency value of Japanese GDP. The foreign-currency value of imports would rise by about 7 percent given the assumed price elasticity, while their share in GDP would drop by 3 percent—to about 10 3/4 percent. Thus the surplus would fall from 3 1/2 percent of GDP to 2 1/2 percent. Part of this drop would reflect a “shrinkage” of the initial surplus as a share of GDP due to valuation effects—starting from initial balance with equal shares of 12 1/2 percent of GDP, a 10 percent appreciation would reduce the surplus by only 0.7 percent of GDP.
Of course, the similarity of the results partly reflects the assumption of the same price elasticities. It also indicates, however, that movements in trade volumes were consistent with changes in relative unit labor costs as well as direct measures of trade prices.
Of course, an activity elasticity in trading partners other than unity is inconsistent with a stable long-run share of imports in GDP and cannot continue indefinitely.