Japan's Fiscal Crisis and Implications for Imports from Korea

Abstract

Korean exports to Japan are highly correlated to Japanese GDP growth. Given Japan’s large fiscal deficit and debt, there is concern that future government austerity measures may cause a collapse in Korean exports to that country. After summarizing the magnitude of Japan’s fiscal woes, we investigate whether austerity measures are likely to cause a collapse in such exports. We find no statistically significant relationship between Japanese fiscal policy and Korean exports to Japan, as well as no evidence that past fiscal policy in Japan has had significant impact on Japanese GDP growth. We conclude that future Japanese austerity measures are unlikely to cause a collapse in Korean exports to Japan.

Keywords: austerity, economic growth, exports, neutrality

JEL Classification: F1, E6