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Romain Wacziarg

This compelling Literature Review Article discusses the major literary contributions to the economic analysis of the consequences of trade liberalization on growth, productivity, labor market outcomes and economic inequality. Examining the classical theories that stress gains from trade stemming from comparative advantage, the review also analyses more recent theories of imperfect competition, where any potential gains from trade can stem from competitive effects or the international transmission of knowledge. Empirical contributions provide evidence regarding the explanatory power of these various theories, including work on the effects of trade openness on economic growth, wages, and income inequality, as well as evidence on the effects of trade on firm productivity, entry and exit. This Research Review will be an invaluable research resource for academics, practitioners and those drawn to this fascinating topic.
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Romain Wacziarg

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Romain Wacziarg

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Romain Wacziarg

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

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Managing Currency Risk

How Japanese Firms Choose Invoicing Currency

Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

This book demonstrates how exporters’ decisions regarding choice of invoice currency can be influenced by many factors including firm size, product competitiveness, intra/inter-firm trades, and the geography of export destination. The aim is to enhance our understanding of exporters’ behavior in terms of managing currency risk. It contains detailed research and insightful data focusing on Japanese exporters and shows how they face an important trade-off in choosing the invoice currency. If exports are invoiced in yen, then exchange rate fluctuations will pass through to retail prices ultimately affecting sales volumes. However, if they choose to invoice in the importer’s currency, then sales volumes are largely unchanged.
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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 7 defines the internationalization of a currency as the use of a currency in six cells in the 3 _ 2 matrix: 3 functions of money, namely ‘unit of account’, ‘settlement’ and ‘store of value’, and 2 sectors, ‘private’ and ‘public’, and discusses the history of the internationalization of the yen and China’s recent efforts toward internationalization of the RMB. Our latest questionnaire survey indicates that RMB cross-border transactions are not increasing among Japanese multinational firms at the moment. As long as capital controls exist, Japanese firms do not recognize that the RMB is a convenient international currency. These findings suggest that there is a dilemma for Chinese monetary authorities: unless capital controls are lifted, firms will be reluctant to use the RMB due to the restrictions; but as capital controls are being lifted, the exchange rate volatility rises, which makes the firms avoid the use of that currency.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 6 investigates the invoice currency choices of Japanese production subsidiaries, using the firm-level information obtained through questionnaire surveys with Japanese overseas subsidiaries conducted in 2010 and 2014. We find that Japanese subsidiaries in North America tend to use the US dollar in both exports and imports, while subsidiaries in Europe tend to choose the euro in trade with Japan. Asia-based subsidiaries tend to choose the yen and the US dollar in both imports from and exports to Japan, and the share of the US dollar increases from 2010 to 2014. The US dollar is generally used in trade with other countries. By conducting Logit estimation, we find that intra-firm trade between Asia and Japan facilitates yen-invoiced trade. However, a large dependence of the group company on the US market in terms of consolidated sales impedes the yen-invoiced trade even for Asia-based subsidiaries’ exports to Japan.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 1 introduces the theme of this book, exchange rate risk for the exporters, by showing the sensitivity of corporate earnings and stock prices to exchange rate fluctuations. When the yen appreciates, corporate earnings and the Nikkei Index tend to fall. Faced with a long-run trend of yen appreciation, Japanese exporting firms have taken many countermeasures to lessen the exchange rate impact on their sales and profits. By invoicing in yen, they can avoid the exchange rate risk. However, importers suffer from exchange risk and have to absorb the change in import costs by changing their profit margins. Hence, which currency exports should be invoiced in depends on the nature of the products, the relationship between exporter and importer, and whether the exported goods are for the local market or for re-exporting after assembly. The chapter introduces these concepts and sets up the questions to be answered in later chapters.

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Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato and Junko Shimizu

Chapter 3 examines a new data set based on interviews with 23 globally operating Japanese firms. Novel findings here are three-fold. First, Japanese head offices tend to invoice in the importer’s currency in exports to advanced countries so that local subsidiaries can be free from exchange rate risk in their imports from head offices. Second, Japanese firms that export highly differentiated products or that have a dominant share in global markets tend to choose yen invoicing. Third, although Japanese firms have shifted their production bases to Asian countries, exports from these Asian bases tend to be invoiced in US dollars as long as the final destination market is the US. Thus, a smaller share of yen invoicing in Japanese exports even in the 2000s is due to the growing intra-firm trade promoted by the active overseas operations of Japanese electronics firms combined with products having US markets as their final destination.