Understanding Japan's Capital Goods Exports

Japan is the leading supplier of sophisticated capital goods to East Asian countries. These goods embody advanced technologies and facilitate learning and productivity growth. Capital goods also represent 30-40% of Japan's exports. This paper investigates the determinants of these exports. Results from dynamic ordinary least squares estimation indicate that exports depend on exchange rates, income in the importing countries and downstream countries' exports to the rest of the world. Results from out-of-sample forecasts indicate that Japanese exports crashed in 2009 because of the perfect storm of a yen appreciation, a global slowdown and a collapse in Asia's exports.