The paper examines empirically those supply factors that give rise to export expansion at a time of domestic recession or rapid growth in Japan-U.S. bilateral trade. These factors, or supply pressures including “capacity pressure”, tend to reduce the effect of exchange rate appreciations or other demand shocks that would otherwise reduce the current account surplus in the absence of such supply pressures.
In this paper, two elements of supply pressure, full-employment capacity and the inventory of finished goods, are specified as the supply factors. A simultaneous equation approach with a Almon lag structure is adopted to examine the supply schedules of exports, as distinct from the demand schedules. Positively-sloped supply schedules of exports with these two shift factors for both countries are successfully estimated.
The paper demonstrates that an increase in capacity often promotes exports with a lag structure spreading over as many as twelve quarters. The level of inventory is negatively correlated with exports, although the rate of change (increase) may be positively correlated with the level of exports in both countries. The negative correlation suggests that planned inventory plays a larger role than unintended inventory.
The paper also shows that these supply pressures are much stronger on Japan’s exports to the U.S. than on U.S. exports to Japan, and that the supply pressure in Japan is much larger than earlier estimates indicated. Corresponding import-demand functions and supply functions of domestic goods are estimated. It is shown that capacity pressure is much weaker in the domestic market than in the export market in both countries.