Exchange-rate risk and U.S.-Japan trade: Evidence from industry level data

Since the Bretton Woods system of fixed exchange rates broke down in 1973, the resulting increase in exchange-rate variability has introduced uncertainty into trading relationships worldwide. Has this increased volatility had an effect on Japanese-U.S. trade? To answer this question, we apply cointegration analysis to disaggregated export and import data for 117 Japanese industries from 1973 to 2006. We find that in the long run, the trade shares of most industries are relatively unaffected by increased uncertainty, while other industries experience a relative increase or decrease in their proportion of overall trade. In the short run, some industries are influenced by exchange-rate volatility, but this effect is often ambiguous. Japanese exports of certain manufactures seem to improve in the long run relative to overall trade flows. J. Japanese Int. Economies 22 (4) (2008) 518-534.