Fluctuation of Exchange Rates, Foreign Direct Investment, and Hollowing Phenomenon

Abstract

The Japanese Yen has appreciated rapidly since the Plaza Agreement in September, 1985 and Japanese foreign direct investment has steadily increased as well. If foreign direct investment continues and overseas production or knockdown plants and re-imports are increased, the capital outflowing country may suffer the so-called hollowing phenomenon. Many businessmen, politicians, bureaucrats, scholars have begun to worry about the occurrence of the hollowing phenomenon in manufacturing industries in Japan. The hollowing phenomenon occurred in the early 1980s in the United States of America. US foreign direct investments increased and many US firms shifted their production plants to foreign countries. US manufacturing industries declined as the result of those movements. Most people of Japan at that time came to the conclusion that deindustrializaion and hollowing out in the manufacturing industries were a kind of international division of labor or a process of industrial reorganization and these movements were rather preferable. Therefore, many felt that there was no need to worry about the appearance of the hollowing phenomenon and there is no need for a pessimistic vision of the future. One of the typical examples is in Shinohara’s Paper 1987 (7). The bubble boom collapsed in 1991 and Japanese economy entered a prolonged recession.