Effect of Exchange Rates and Gasoline Prices on US Imports of Japanese Automobiles

Abstract

We analyze the effects of gasoline prices and exchange rates on Japanese automobile imports to the United States between 1970 and 2004. We test the relationships before, during, and after the Voluntary Restraint Agreement placed on Japanese imports between 1981 and 1988. We also control for general demand for automobiles and domestically manufactured Japanese vehicles. As expected, we found that demand for Japanese imports is positively correlated with the price of gasoline. Before 1988 the demand for Japanese imports contributed to a strengthening of the yen. But after, a positive relationship between the yen-for-dollar exchange rate and imports has prevailed.

KEYWORDS:

• automobile imports, gasoline prices, exchange rates

Notes

¹In fact, Toyota and Nissan made an abortive attempt to begin exporting to the United States in the early 1960s, but their cars were underpowered and had serious mechanical problems. See Sobel (1984) and Eden and Molot (1996) for details.

²There is a considerable economic literature concerning the effectiveness and consequences of the VRA. For instance, Goldberg (1994) and (1995) argues that the restraints had there most serious effects on Japanese imports in the early years of the VRA, while Berry, Levinsohn and Pakes (1999) argue the effects were stronger in later years.

³In fact, there was a wave of Japanese foreign direct investment (FDI) into the United State in the 1980s. To some extent this investment was driven by the rise in value of the yen. In addition to Gray and Lundan (1993), see Lowinger, Lal and Nozaki (1995) and Dunning and Lundan (1997) for more detail on the reasons for Japanese FDI in the United States.

⁴ www.eia.doe.gov/emeu/steo/pub/fsheets/PetroleumPrices_files/v3_document.html

⁵ http://investintaiwan.nat.gov.tw/en/env/stats/cpi.html

⁶ http://eh.net/hmit/exchangerates

⁷ http://www.mac.doc.gov/japan/source/menu/trade/usjmt.htm

⁸These are imported vehicles with Japanese, European and South Korean name plates, not vehicles manufactured over seas and sold under American name plates.

⁹To confirm that the relationship between the exchange rate and automotive imports in the post-VRA period are significant, we test an alternative specification of our model, removing the dummy variable in the post-VRA period, and adding a dummy for the pre-VRA period. This specification confirms that there is a significant positive relationship between the weakening of the yen and Japanese vehicle imports in the post-VRA period.