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Currency Invoicing and Foreign Exchange Risk Management: A Case Study of Japanese Firms (Japanese)

Author

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  • ITO Takatoshi
  • KOIBUCHI Satoshi
  • SASAKI Yuri
  • SATO Kiyotaka
  • SHIMIZU Junko
  • HAYAKAWA Kazunobu
  • YOSHIMI Taiyo

Abstract

This paper, through interviews with 12 major Japanese firms, has revealed new "stylized facts" of the Japanese firms' strategy of currency invoicing, foreign exchange risk managements, and price-setting in recent years. It is also investigated whether these stylized facts are consistent with what has been theoretically and empirically found in the literature. First, the amendment of Foreign Exchange and Foreign Trade Control Law in 1998 had significant impact on the foreign exchange risk management of Japanese firms. Electronics and automobile companies pursue the most efficient settlements of trade transactions under the amended law, and currency invoicing is one of the most important strategic variables to optimize their foreign exchange risk managements. Second, as intra-firm trade has been increasingly a major part of their external trade, Japanese electronics and automobile companies have a strong tendency to choose local currency invoicing in exports to advanced countries, while U.S. dollar invoicing has been increasing when exporting to East Asian countries. Such an invoicing strategy aims at stabilizing the local currency (or U.S. dollar) price of their exports in local markets, which conforms to the pricing-to-market (PTM) behavior discussed in the literature. Third, the recent increase in U.S. dollar invoicing in East Asia can be attributed to (i) U.S. dollar's dominant role of world financial and foreign exchange transactions, (ii) the importance of the U.S. markets as a final export destination, and (iii) the increasing intra-firm transactions as Japanese firms has established regional production networks. Fourth, the currency invoicing and price-setting strategies are affected by competitors in global markets where it is hard to pass-through exchange rate risks to importers due to the strong market competition. Since U.S. dollar invoicing is now dominant in the East Asian markets, not only Japanese parent companies but also local affiliates in East Asia will take exchange rate risks against the U.S. dollar if the dollar fluctuates unstably. As the intra-regional trade keeps growing, it will become more important for East Asian countries including Japan to stabilize the exchange rate not vis-a-vis the U.S. dollar but between the regional currencies. This aspect will have important implications for new strategy of optimal exchange rate risk management and, hence, establishing regional currency arrangements such as a common currency basket in East Asia.

Suggested Citation

  • ITO Takatoshi & KOIBUCHI Satoshi & SASAKI Yuri & SATO Kiyotaka & SHIMIZU Junko & HAYAKAWA Kazunobu & YOSHIMI Taiyo, 2008. "Currency Invoicing and Foreign Exchange Risk Management: A Case Study of Japanese Firms (Japanese)," Discussion Papers (Japanese) 08009, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:rdpsjp:08009
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    1. repec:wsi:jicepx:v:02:y:2011:i:01:n:s1793993311000233 is not listed on IDEAS
    2. Willem Thorbecke, 2011. "The Effect Of Exchange Rate Changes On Trade In East Asia," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 85-102.
    3. Thorbecke, Willem & Salike, Nimesh, 2011. "Understanding Foreign Direct Investment in East Asia," ADBI Working Papers 290, Asian Development Bank Institute.
    4. Hayakawa, Kazunobu & Kimura, Fukunari, 2008. "The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia," IDE Discussion Papers 156, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    5. Willem THORBECKE, 2012. "Investigating China's Disaggregated Processed Exports: Evidence that the RMB matters," Discussion papers 12003, Research Institute of Economy, Trade and Industry (RIETI).

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