Recherche FFJ Research Statement Willem Thorbecke

Willem Thorbecke

Investigating How Exchange Rates, COVID-19, and Other Shocks Affect Japanese and European Exporters




Exchange rates, COVID-19, and other shocks affect exporters in Japan and Europe. This project investigates how these shocks affect exporters’ pricing decisions, profitability, and sales volumes. By comparing responses across firms, industries, and countries it seeks to shed light on why these shocks impact different agents in different ways.


Exchange rate volatility is endemic. In the current floating exchange rate era, the yen, the euro, and other currencies have experienced many depreciation and appreciation episodes. In addition, shocks such as the coronavirus pandemic have occurred. How do these affect Japanese and European exporters?

A weaker currency could raise profit margins, if firms increase home currency export prices and keep foreign currency export prices constant. For instance, if the Japanese yen depreciated by 10 percent, a Japanese automobile exporter could raise yen export prices by 10 percent and still keep the U.S. dollar prices of cars sold in the U.S. constant. This would increase yen revenues and raise automakers’ profits.

A weaker currency could also increase the volume of exports if firms lower export prices in foreign currencies. For instance, if the Japanese yen depreciated by 10 percent, a Japanese automobile exporter could keep yen export prices constant and lower U.S. dollar prices of cars sold in the U.S. by ten percent. This would increase the volume of Japanese cars sold in the U.S.

This research project investigates how exchange rates affect the pricing behavior, profits, and export volumes of Japanese and European exporters. One might expect differences between Japan and Europe because Boz et al. (2020) reported that less than 38 percent of Japanese exports are invoiced in Japanese yen whereas 80 percent or more of exports from major Eurozone countries are invoiced in euros. Thus euro export prices are more likely to remain constant in the short run in response to exchange rate changes compared to yen export prices.

The research also considers how the pandemic is affecting the exports and profitability of Japanese and European firms.

Research Methodology

The methodology begins by investigating exchange rate pass-through equations for Japanese and European exports. Exchange rate pass-through concerns what percentage of an exchange rate change gets transferred to tradable prices. If exporters keep foreign currency prices constant, then there is no exchange rate pass-through. On the other hand, if they change foreign currency prices one-for-one with exchange rate changes, then there is 100 percent pass-through. To estimate short run pass-through the approach of Ceglowski (2010) is employed. She investigated how changes in export prices depend on exchange rates, foreign price levels domestic costs, and economic activity in importing countries. She employed a technique called first difference regressions to estimate short run responses. To investigate long run pass-through the approach of Nguyen and Sato (2019) is used. They employed similar variables to Ceglowski but employed a technique called nonlinear autoregressive distributed lag estimation to calculate long run responses. Pass-through responses could be investigated by country and industry.

To investigate how exchange rates affect exporters’ profitability the project investigates how exchange rates affect stock prices. Standard finance models predict that stock prices equal the expected present value of future cash flows. Stock price responses thus provide information about how exchange rates and other variables affect profitability. Following Ito et al. (2016), Dominguez and Tesar (2006), Jayasinghe and Tsui (2008) and others, exchange rate exposure equations are estimated. This approach is applied across countries and industries.

To investigate how exchange rates affect exports, standard exchange rate equations are estimated (see, e.g., Chinn, 2005). In theory the volume of exports depends on the real exchange rate and on real GDP in the importing countries. Equations relating exports to exchange rates, real GDP, and other variables are estimated at the country and also the industry-level.

The COVID-19 crisis has decimated GDP in importing countries and caused exports to fall. To investigate how the pandemic has affected exports, export equations across sectors and countries are estimated up until the end of 2019. Actual values of exchange rates and GDP in importing countries in 2020 are then used to forecast what exports would be expected over the next several quarters. The difference between these forecasted exports and actual exports provides an indication of how the crisis is affecting the volume of exports across sectors and countries.

To investigate how the pandemic affects profitability across sectors, stock market responses during the crisis are estimated. Stock returns across industries and countries are regressed on economy-wide variables such as inflation and measures of real activity. The changes in stock returns arising from macroeconomic factors and from firm and industry specific responses are then calculated. These latter idiosyncratic responses during the crisis largely reflect how the pandemic is affecting individual sectors. For instance, the crisis may be good for computer game stocks and bad for restaurant and bar stocks. Examining the stock market response thus indicates how different sectors and countries are faring during the crisis.

Contribution and Expected Results

The project can thus shed light on how exchange rates affect export volume and exporter profitability across industries and countries in Europe and Japan. It can try to explain why these responses might differ. For instance, are more sophisticated exports less exposed to exchange rate changes than commoditized exports? Are exports produced within global value chains less affected by exchange rates than other exports? Are some countries in Europe or some industries affected more by exchange rates? How does currency invoicing relate with these exchange rate effects? In addition, the project investigates how the COVID-19 crisis is impacting the European and Japanese economies and individual sectors. It is hoped that the findings will not only contribute to knowledge but also help in the design of appropriate policy responses.


Boz, E., C. Casas, G. Georgiadis, G. Gopinath, H. Le Mezo, A. Mehl and T. Nguyen, 2020. Invoicing Currency Patterns in Global Trade. IMF Working Paper no. 20-126, International Monetary Fund, Washington DC

Ceglowski, J., 2010. Has Pass-through to Export Prices Risen? Evidence for Japan. Journal of the Japanese and International Economies 24, 86-98.

Chinn, M. 2005. Doomed to Deficits? Aggregate U.S. Trade Flows Re-examined. Review of World Economics 141, 460-485.

Dominguez, K., and L. Tesar, 2006. Exchange Rate Exposure. Journal of International Economics 68, 188-218.

Ito, T., S. Koibuchi, K. Sato, and J. Shimizu, 2016. Exchange Rate Exposure and Risk Management: The Case of Japanese Exporting Firms. Journal of the Japanese and International Economies 41, 17-29.

Jaysinghe, P., and A. Tsui, 2008. Exchange Rate Exposure of Sectoral Returns and Volatilities: Evidence from Japanese Industrial Sectors. Japan and the World Economy 20, 639-660.

Nguyen, T., and K. Sato, 2019. Firm Predicted Exchange Rates and Nonlinearities in Pricing-to- Market. Journal of the Japanese and International Economies 53, 1-16.