Japan is offering a neat example of the J-curve (short term violation of the Marshal-Lerner condition), showing that the trade balance may deteroriate following a sudden depreciation in the currency – due largely to the fact the volume of exports and imports takes time to respond to price signals (they are sufficiently price inelastic in the short term).
Japan’s trade deficit swelled to a record 1.63 trillion yen ($17.4 billion) on energy imports and a weaker yen, highlighting one cost of Prime Minister Shinzo Abe’s policies that are driving down the currency.
The increase in fuel imports due to the movement away from nuclear energy following the Tsunami – and the drop in Chinese exports due to the Senkaku Island dispute, and implicit embargo – are factors that have helped to drive a deficit overall. But these recent movements, following a sharp depreciation in the currency after changes in expected monetary policy (the new expectation Japan may actually allow inflation above 0%), provide a new example of the J-curve in action. A nice teachable moment for people that way inclined!