Does financial variable(s) explain the Japanese aggregate import demand? A cointegration analysis

Abstract

This study is an extension of the study by Tang (Japan and the World Economy, 15, 419–36, 2003b), which has documented no long-run equilibrium relationship among the Japanese aggregate imports, real income and relative price of imports. This finding, however, is probably due to the bias of variable(s) omission. To fill this gap, financial variable(s) has been empirically incorporated into the Japan's import demand analysis. Using a cointegration approach, this study has provided empirical support for the inclusion of financial variable(s) into the Japanese aggregate import demand function. This is an important finding from the viewpoint of policymakers upon the implications of momentary policies on the Japanese trade balance.

Notes

According to Xu (2002, p. 269), this variable is GDP−I−G−EX, where I is investment, G is Government spending, and EX is exports.

Perman (1991, p. 20) has noted, ‘If we fail to find a cointegrating vector for a given set of variables, we may investigate whether a broader set of series is cointegrated. Thus the technique serves as a form of misspecification test, or equivalently as a guide to variable selection’. Craigwell (1994) has used the credit from the banking system into aggregate import demand estimates for Barbados. If income rises, it is expected that given a high propensity to import the level of imports will increase. On the other hand, a ready source of credit is necessary to accommodate the increase in spending (Craigwell, 1994, p. 128). Employing annual data for the period 1960–1993, Craigwell (1994) has found that the traditional model that contains only prices and real income as explanatory variables are not cointegrated, suggesting specification error in import demand function.

The results of Phillip–Perron unit root test are not reported here but are available from the author upon request.