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The Choice of Invoice Currency in International Trade: Implications for the Internationalization of the Yen

  • Oi, Hiroyuki

    (Institute for Monetary and Econ Studies, Bank of Japan)

  • Otani, Akira

    (Institute for Monetary and Econ Studies, Bank of Japan)

  • Shirota, Toyoichiro

    (Institute for Monetary and Econ Studies, Bank of Japan)

In this paper, we present an overview of theoretical research on the choice of an invoice currency for exports from the perspective of expected profit maximization. We then use this theory as a basis to offer a current assessment and future outlook regarding the use of the yen in trade transactions, which is one aspect of the internationalization of the yen. Our analysis demonstrates that the current use of the yen to price exports is largely consistent with levels that can be explained by theory. This suggests that the current measures for improving Japanese financial markets are, by themselves, likely to have only a limited impact on expanding the use of the yen as a denomination for trade transactions, given the current international competitiveness and market share of Japan's manufacturing industry and the current exchange rate regimes. Moreover, the currency-basket regime that has been proposed for East Asia from the perspective of the internationalization of the yen is not necessarily theoretically desirable for the region, nor is expanded use of the yen in trade transactions necessarily a free lunch for Japan, in that it may very well bring with it new problems for implementing economic policies.

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Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

Volume (Year): 22 (2004)
Issue (Month): 1 (March)
Pages: 27-63

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Handle: RePEc:ime:imemes:v:22:y:2004:i:1:p:27-63
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  1. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  2. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  3. Shin-ichi Fukuda & Ji Cong, 1994. "On the Choice of Invoice Currency by Japanese Exporters: The PTM Approach," Discussion Paper Series a289, Institute of Economic Research, Hitotsubashi University.
  4. Charles Engel, 2001. "Optimal exchange rate policy: the influence of price setting and asset markets," Proceedings, Federal Reserve Bank of Cleveland, pages 518-547.
  5. Chrystal, K Alec, 1977. "Demand for International Media of Exchange," American Economic Review, American Economic Association, vol. 67(5), pages 840-50, December.
  6. P. Bacchetta & E. van Wincoop, 2002. "A Theory of the Currency Denomination of International Trade," DNB Staff Reports (discontinued) 75, Netherlands Central Bank.
  7. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-Validating Optimum Currency Areas," NBER Working Papers 8783, National Bureau of Economic Research, Inc.
  8. Bacchetta, Philippe & van Wincoop, Eric, 2002. "A Theory of Currency Denomination of International Trade," CEPR Discussion Papers 3120, C.E.P.R. Discussion Papers.
  9. Eiji Ogawa & Takatoshi Ito, 2000. "On the Desirability of a Regional Basket Currency Arrangement," NBER Working Papers 8002, National Bureau of Economic Research, Inc.
  10. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  11. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  12. Fujiki, Hiroshi & Otani, Akira, 2002. "Do Currency Regimes Matter in the 21st Century? An Overview," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(S1), pages 47-79, December.
  13. Friberg, Richard, 1996. "On the Role of Pricing Exports in a Third Currency," SSE/EFI Working Paper Series in Economics and Finance 128, Stockholm School of Economics.
  14. Friberg, Richard, 1998. "In which currency should exporters set their prices?," Journal of International Economics, Elsevier, vol. 45(1), pages 59-76, June.
  15. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
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