The J-curve: Evidence from Commodity Trade Between Malaysia and Japan

In an effort to distinguish the short-run response (the J-curve effect) of currency depreciation from its long-run response on trade balance, the current study employs a model which relates the trade balance to the exchange rate directly along with other variables. This study considers 67 industries (2-digit and 3-digit SITC classifications) and investigates the short-run (J-curve pattern) and the long-run effects of the real depreciation ringgit/yen on the trade balance of each industry. Using annual import and export data over the period of 1974-2009, this study employs the bounds testing approach to cointegration and error-correction modelling. The empirical results indicate that whilst depreciation of ringgit has short-run significant effects on the trade balance in majority of the industries, the short-run effects translate into the favorable long-run effects only in 24 of the 67 industries. However, in only 22 industries empirical support for the J-Curve is established.