Neat example of the J-curve

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!

  • Logan

    Every now and then the real world puts up an example that fits right in with even the most basic of theory.

    The J-curve was one of the things that stood out in my international monetary paper. Mostly because it rarely get brought up when considering exchange rates. Even now, with all the talk of currency wars and so called manufacturing crises making the MSM, the J-curve is left out of the conversation.

    To me the J-curve is the biggest reason not to jump in and manipulate the NZD down. I see current exchange rates as merely transitory until inflation fundamentals settle down. Unless it’s going to take longer than the short-term period the J-curve is negative (2-4 years??) to correct there is no benefit.

    • Tis a nice example of how trying to fiddle “short term things” can throw around unintended consequences for sure.

      I think the “manufacturing crisis” needs a broader context than “the dollar” – which is why I like the RBNZ speech yesterday!

    • I’d also note that manufacturers are complaining about a lack of profitability, rather than a lack of output – so even with a J-curve effect, this still accounts to an income transfer from importers to exporters … solving that “issue”.

  • Pingback: Neat example of the J-curve | Fifth Estate()