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

  • Kentaro Iwatsubo

    (Policy Research Institute)

  • Shunji Karikomi

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.

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File URL: http://www.eaber.org/node/21970
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Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 21970.

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Date of creation: Jan 2006
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Handle: RePEc:eab:macroe:21970
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

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  1. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
  2. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
  3. Caporale, Tony & Doroodian, Khosrow, 1994. "Exchange rate variability and the flow of international trade," Economics Letters, Elsevier, vol. 46(1), pages 49-54, September.
  4. Fernald, John & Edison, Hali & Loungani, Prakash, 1999. "Was China the first domino? Assessing links between China and other Asian economies," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 515-535, August.
  5. Arize, Augustine C & Osang, Thomas & Slottje, Daniel J, 2000. "Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDC's," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 10-17, January.
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