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

  • Kentaro IWATSUBO

    (Hitotsubashi University, and Policy Research Institute, Ministry of Finance, Japan)

  • 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/21912
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Paper provided by East Asian Bureau of Economic Research in its series Trade Working Papers with number 21912.

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Date of creation: Jul 2006
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Handle: RePEc:eab:tradew:21912
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  1. 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.
  2. Charles Engel, 1992. "Real Exchange Rates and Relative Prices: An Empirical Investigation," NBER Working Papers 4231, National Bureau of Economic Research, Inc.
  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. Jeffrey Frankel, 2005. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," NBER Working Papers 11274, National Bureau of Economic Research, Inc.
  5. 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.
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