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For details of the analysis, read the captioned Discussion Paper. Views expressed in this Non Technical Summary are solely those of the individual author(s), and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI). International Macroeconomics (FY2011-FY2015) East Asian Production Networks, Trade, Exchange Rates, and Global Imbalances Japan is upstream in East Asian value chains. It ships large quantities of sophisticated capital and intermediate goods to China, the Association of Southeast Asian Nations (ASEAN), South Korea, and Taiwan. These goods then are used frequently to produce goods for re-export. Capital and equipment goods are a crucial component of Japan's overall export structure. Since 1983, between 30% and 40% of the value of Japan's exports have been capital goods. When these exports fell by 32% in 2009, they contributed to a collapse in firms' operating profits and a loss of employment in Japan. Almost 50% of Japan's capital and equipment goods exports flows to East Asia and another 40% goes to the Organisation for Economic Co-operation and Development (OECD) countries. Figure 1a shows Japanese capital goods and intermediate goods exports to East Asian supply chain countries, and Figure 1b shows these exports to the rest of the world. The East Asian supply chain countries are China, Indonesia, Malaysia, Singapore, South Korea, Taiwan, and Thailand. Figure 1 makes clear that, to East Asia, Japanese capital goods exports are closely related to Japanese intermediate goods exports, while to the rest of the world, Japanese capital goods exports are somewhat decoupled from Japanese intermediate goods exports. Japanese capital goods exports to East Asia thus are closely linked to East Asian supply chains. An increase in exports from East Asian countries to the world should increase Japanese capital goods exports to East Asia. This paper provides evidence on the determinants of Japan's capital goods exports. It employs a panel data set including Japan's capital exports to major trading partners and a variety of specifications. The results indicate that Japanese capital goods exports are sensitive to exchange rates, income in the importing countries, and exports from East Asia. When the sample is truncated in 2008 and actual out-of-sample observations on exchange rates, income, and other independent variables from 2009 are used to forecast capital goods exports in 2009, the forecasted drop is larger than the actual drop. These results imply that the combination of the collapse in Asia's exports, the worldwide recession, and the appreciation of the yen caused a perfect storm for Japanese capital goods exports in 2009. The Japanese yen began depreciating in November 2012. Automakers in South Korea complained that the depreciation of the yen is hurting their price competitiveness and profitability. The South Korean finance minister warned that the depreciation of the yen is a flashing red light for Korean exporters. Many have complained that Japan is engaging in a currency war with its Asian neighbors. What has been less discussed, however, is the salutary effect that the weaker yen can have on emerging East Asian countries that are in a complementary relationship with Japan. The results in this paper indicate that the depreciation of the yen will substantially increase steady state capital exports to Asia and the rest of the world, which will benefit Japanese firms. It will also benefit firms in East Asia by allowing them to acquire vital inputs and assimilate new technologies and firms in the developed world by facilitating the gains from intra-industry trade. Figure 1a. Value of Japanese Capital and Equipment Goods Exports and Intermediate Goods Exports to East Asia Note: East Asia includes China, Indonesia, Malaysia, Singapore,South Korea, Taian, and Thailand. Source: CEPII-Chelem Database Figure 1b. Value of Japanese Capital and Equipment Goods Exports and Intermediate Goods Exports to Non-East Asian Countries Note: Non-East Asian importers include all countries except those listed in Figre 1a. 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