Strategic Trade Policy and Exchange Rate Subsidies: A Study of American Auto Markets

Can intervention by the Bank of Japan on the yen/dollar rates be used as a strategic policy to promote Japanese exports to the U.S. markets？ We develop theoretical models based on strategic trade policy literature to explain possible impacts on U.S. automobiles. During the last decade, the changes of yen/dollar rates have coincided with dramatic market-share gains by Japanese automakers in the U.S. market. In the meantime, intervention by the Bank of Japan on the yen/dollar market has reached a record high. Our models assume interventions have two channels to influence U.S./Japan trade. First, we hypothesize that official currency manipulation by the Bank of Japan was implemented as a means to subsidize Japanese. The second channel resulted from the relationship between the expectation of an unavoidable foreign exchange rate appreciation and automobile purchase behavior of U.S. consumers. We assembles the famous “peso problem” in international finance. By preventing the prompt appreciation of JPY using intervention strategy, we argue that intervention by the Bank of Japan create a notion of unavoidable appreciation of JPY rate. This prompts U.S. consumers to purchase cars earlier. We explore the effects of intervention of Bank of Japan on the changes of sale volume and market shares of U.S. and Japan automakers and the results show that the sale volume and market share of American automakers decrease while these of Japanese automakers increase. Empirical results also indicate that U.S. consumers tend to purchase more Japanese automobiles when the Yen’s appreciation is withheld temporary level they have expected. After comparisons, we conclude that interventions by the Bank of Japan affect American automakers through cost disadvantage and Japanese automakers through another channel. Results also imply that the effects of intervention on Japan/U.S. trade lie more through the channel of cost subsidy