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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.

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.

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.

Chapter 5 identifies the types of risks to which a firm is exposed and shows a conceptual diagram of exchange rate risk management strategies. New findings on Japanese firms’ exchange rate risk management approaches are also presented. Through detailed and firm-specific investigation from our firm-level surveys, we find the following characteristics. First, firms with higher sales and greater dependency on foreign markets more actively engage in currency hedging activities, including financial and operational hedging. Second, Japanese firms use both financial and operational hedging complementarily. Third, US dollar invoicing is supported by both financial and operational hedging. Fourth, yen invoicing is a substitute for operational and financial hedging. Fifth, exchange rate pass-through is also a substitute for financial hedging. However, most Japanese exporters cannot change their export price easily even if facing a large fluctuation of exchange rates. In addition, larger sized firms are more likely to increase the degree of pass-through than smaller firms.

Chapter 2 surveys recent developments in theoretical and empirical studies on the question of invoice currency choice. By examining aggregate data on invoice currency, published by the authorities, it is shown that the Japanese invoicing currency pattern violates well-known stylized facts: (1) trade between advanced countries tends to be invoiced in the exporter’s currency; (2) trade between advanced and developing countries tends to be invoiced in the advanced country’s currency; and (3) differentiated products tend to be invoiced in the exporter’s currency. More homogeneous products are typically invoiced in an international currency such as the US dollar. Chapter 2 presents two puzzles. First, Japanese exports to advanced countries tend to be invoiced in the importer’s currency; and second, the share of US dollar invoicing is higher than that of yen invoicing in trade with Asia. In order to solve these puzzles, subsequent chapters examine firm-level data obtained through interviews and questionnaire surveys.