Abstract for: Exchange Rates and Deindustrialization: Japanese Experiences
The strongest yen’s appreciation in 2011 made many Japanese companies choose foreign operations. The general public is worrying that this choice may put them out of work. Contrary to this public debate, academic debate argues that deindustrialization is the natural outcome of the successful economic development in advanced economies. However, a regression analysis on the current Japanese economy suggests that the negative deindustrialization or hollowing out has started. Based on statistical findings, this paper develops a system dynamics model and examines the negative effect of deindustrialization. A shift from domestic production to overseas production reduces economic performance little by little. Although foreign direct investment is preferred to exports under the home currency appreciation, this myopic strategy will hollow out the domestic industry in the long run.