Analysis of the Effect of Real Exchange Rate on Trading Balance Case Study of Indonesia - Japan Bilateral Trade Relations (MLR and J-Curve Conditions)

Abstract

Exchange rate is one of the important factors in an open economy considering that it has such a
large influence on the trade balance and other macroeconomic variables. Besides, the exchange rate shows
competitiveness in the international market. This study aims to analyze how much influence the exchange
rate has on the trade balance of a case study on Indonesia's bilateral trade relations with its main trading
partners, namely Japan. There is a phenomenon based on the data on the exchange rate of the rupiah against
the Japanese yen (IDR / ¥), where the rupiah in the last 25 years (1995-2019) has depreciated against the
Japanese yen, it should be based on the theory that if the domestic currency depreciates against the foreign
currency then There was a continuous increase in the value of exports in accordance with the depreciation of
the rupiah against the Japanese yen during this period and conversely there was a decrease in the value of
imports so that there would be a trade balance surplus. The results showed that there has been a long term
equilibrium relationship between the data variables in the study which was conducted from the results of the
cointegration test. The results of the Marchel-Lerner test can be concluded that in the long run the MLR
conditions are met (?EX + ?IM> 1), which means that in the long run the real exchange rate has an effect on
increasing exports and decreasing imports so that it affects the trade balance.