A new approach to examining the sustainability of external imbalances: the case of Japan

Abstract

This study aims to solve the puzzle of the conventional practice of examining the sustainability of external accounts by initially looking for cointegration between imports and exports. This study proposes a new approach to examine this thesis using unit root tests (with unknown break date) on trade balance series rather than testing the cointegration relationships between imports and exports. In contrast to previous findings, this study has shown empirically that Japan's trade balances are unsustainable. This finding has important policy implications for Japan's external accounts.

Notes

¹ Other studies on other countries are Bahmani-Oskooee (1994) for Austria; Tang (2002) for ASEAN 5 namely, Indonesia, Malaysia, the Philippines, Singapore and Thailand; Baharumshah et al . (2003) for Indonesia, Malaysia, the Philippines and Thailand; and Lau and Baharumshah (2003) for Malaysia.

² The data are seasonally adjusted monthly data from January 1975 to November 2004, and the source is Bank of Japan (http://www.boj.or.jp/en/stat/dlong_f.htm).

³ Due to space availability, we do not report the output of Johansen's multivariate cointegration tests, but these are available from the author upon request.

⁴ This study, however, does not compute these econometrics since this is outside the author(s) knowledge, and the scope of the present study.

⁵ Another study derived that theoretical framework of the relationship between imports and exports can be found in Arize (2002).

⁶ An early study by Zivot and Andrews (1992) proposed a unit root test with a break point. But, this study employed the unit root tests developed by Lanne et al. (2002) and Saikkonen and Lutkepohl (2002), which provide three possible shift functions that are more appropriate, and thus implemented in this study.

⁷ Using bilateral data, the J-curve phenomenon is supported empirically for the case of Japan. They also found that real depreciation of the yen has favourable long-run effects in the cases of Canada, the UK, and the USA. This study, however, does not discuss this puzzle.