This paper examines how Japanese exporters were able to retain their market shares in Korea when the yen appreciated sharply beginning from 1985. The limited decrease in Japan`s share resulted from (1) an opportunistic share-holding pricing strategy of Japanese exporters: they reduced yen prices even further to retain their shares in cases where they were otherwise likely to lose large shares, and (2) inelastic Korean demand. This study focuses on the pricing behavior of Japanese exporters, using Korean import data and information from field interviews. Some factors enabled Japanese exporters to reduce yen prices. Yen costs of imported inputs for Japan`s exports fell, and Japanese exporters squeezed profit margins that existed before the yen appreciated. Some of them even subsidized price reductions with part of the windfall profits that they realized at home because they did not pass on the decrease in cost of imported inputs to domestic consumers. Subsidized price reductions, accompanied by cost reduction efforts, were a long-term strategy of preempting the entry of competitors since cost reduction required time. If the yen appreciates further, Japanese exporters are likely to substitute imported inputs for Japanese domestic value-added or shift to foreign production while reducing yen prices to defend their markets. This paper uses data from the author`s doctoral dissertation at the Harvard Business School, “The Appreciation of the Yen and Japan`s Exports to Korea.”The author received valuable comments from Louis T. Wells, Jr., Alice H. Amsden, and Benjamin-Gomes Casseres, and financial support from the Harvard Business School`s Division of Research for the dissertation.

• Sun Shik Min