Does the exchange rate matter to bilateral trade between Korea and Japan? Evidence from commodity trade data

This study examines the short- and long-run effects of exchange rate changes on trade flows in the context of disaggregating industry data of bilateral trade between Korea and Japan. For this purpose, an autoregressive distributed lag (ARDL) approach is used. Results show that Korea's exports and imports are relatively sensitive to the bilateral exchange rate in the short-run, but less responsive in the long-run. It is also found that income in the two countries has significant impacts on the bilateral trade flows in both the short- and long-run. Finally, exchange rate uncertainty and Japanese FDI to Korea are found to have little impacts on Korea's trade with Japan in the short- and long-run.

► This study examines the exchange rate impacts on Korea's trade with Japan. ► An ARDL is applied to quarterly industry trade data. ► Exchange rate is found to be more significant in the short-run than in the long-run. ► Income is found to be significant in both the short- and long-run. ► Exchange rate volatility and Japanese FDI to Korea have little effect.