Unconventional Monetary Policy and its External Effects: Evidence from Japan's Exports

type="main"> After Prime Minister Abe advocated a new policy regime, the Japanese yen depreciated substantially, yet Japan's exports did not show significant improvement. To explain this, the paper focuses on external demand and overseas production. Our model shows that a small change in the exchange rate has no effect on exports because of the fixed costs associated with shifting the plant location to other countries. It also implies that a change in the exchange rate has a significant effect on exports either when depreciation coincides with strong external demand or when appreciation coincides with weak external demand. We examine the validity of these theoretical implications through estimating a simple export function in Japan and calibrating our export function. Both of the experiments confirm that the model can track Japan's exports reasonably well, especially after the new policy regime started.