Trade openness and output volatility for the Japanese manufacturing industry

Abstract

This study investigates the relationship between trade openness and output volatility in the Japanese manufacturing industry. It explores whether this relationship depends on the underlying economic environment and industry heterogeneity. The fixed-effect model was applied to the industry panel after estimating volatility using the residual approach. The main findings are as follows: First, openness decreased output volatility before the Plaza Accord in 1985 but increased it afterward. Second, openness decreased output volatility in lower technology sectors before 1985 and increased it thereafter. Third, openness increased output volatility in high-technology sectors before 1985 but did not affect volatility afterward. Fourth, both price and its volatility increased output volatility, while government taxes and subsidies decreased it. In conclusion, this study contributes to the understanding of the relationship between openness and volatility at the industry level by focusing on industry heterogeneity. It also provides insights into the impact of the Plaza Accord from a volatility perspective. The openness-volatility relationship depends on the economic environment and industry heterogeneity. The reversal of this relationship explains why Japanese manufacturers are less active in pursuing the global market after the Accord.