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China’s Reform on Exchange Rate System and International Trade between Japan and China

Author

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  • Kentaro Iwatsubo

    (Policy Research Institute)

  • Shunji Karikomi

Abstract

This paper explores the impacts of exchange rate on trade between Japan and China, with special attention to differences of pricing structure of international trade across industries. Although the Chinese yuan was fixed against the U.S. dollar for several years, it has been fluctuating against the Japanese yen, which provides us with a natural experiment to test the exchange rate effect. We find that exchange rate changes and volatility have little influence on trade volume in most industries, while Chinese economic growth significantly affects Japans export to China. For electrical machinery industry, in which Japanese firms division of production process is prevailing, we find no evidence of exchange rate impact on trade. These results suggest that the recent reform on Chinas exchange rate system does not seem to have a significant effect on the external sectors of the two countries and the cost of exchange rate fluctuation can be, to some extent, mitigated by Japanese firms overseas production and pricing structure.

Suggested Citation

  • Kentaro Iwatsubo & Shunji Karikomi, 2006. "China’s Reform on Exchange Rate System and International Trade between Japan and China," Macroeconomics Working Papers 21970, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:macroe:21970
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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