Supply Pressure and the Export-Import Performance in the Japan-U.S. Bilateral Trade


WP/94/53-EA
Supply Pressure and the Export-Import Performance
in the Japan-U.S. Bilateral Trade by Yusuke Onitsuka

The paper examines empirically those supply factors that give rise
to export expansion at a time of domestic recession or rapid growth in
Japan-U.S. bilateral trade. These factors, or supply pressures including
capacity pressure, tend to reduce the effect of exchange rate appreci-
ations or other demand shocks that would otherwise reduce the current
account surplus in the absence of such supply pressures.

In this paper, two elements of supply pressure, full-employment
capacity and the inventory of finished goods, are specified as the supply
factors. A simultaneous equation approach with a Almon lag structure is
adopted to examine the supply schedules of exports, as distinct from the
demand schedules. Positively-sloped supply schedules of exports with
these two shift factors for both countries are successfully estimated.

The paper demonstrates that an increase in capacity often promotes
exports with a lag structure spreading over as many as twelve quarters.
The level of inventory is negatively correlated with exports, although
the rate of change (increase) may be positively correlated with the level
of exports in both countries. The negative correlation suggests that
planned inventory plays a larger role than unintended inventory.

The paper also shows that these supply pressures are much stronger
on Japan's exports to the U.S. than on U.S. exports to Japan, and that
the supply pressure in Japan is much larger than earlier estimates
indicated. Corresponding import-demand functions and supply functions of
domestic goods are estimated. It is shown that capacity pressure is much
weaker in the domestic market than in the export market in both countries.