International Finance and Corporate Finance: Japanese and European perspectives

Both global and regional economic linkages have strengthened substantially over the past quarter century. We employ a dynamic factor model to analyze the implications of these changes for the evolution of global and regional business cycles. Our model allows us to assess the roles played by the global, regional, and country specific factors in explaining business cycles in a large sample of countries and regions over the period 1960-2010. We find that, since the mid-1980s, the importance of regional factors has increased markedly in explaining business cycles, especially in regions that witnessed a sharp growth in intra-regional trade and financial flows. By contrast, the relative importance of the global factor has declined over the same period. In short, the recent era of globalization has witnessed the emergence of regional cycles.

Currency invoicing in Japanese exports has two puzzling patterns concerning an excessively small share of yen invoicing: one is a strong tendency of Japanese firms to choose the importer's currency invoicing in exports to developed countries and the other is the prevalence of U.S. dollar invoicing in Japanese exports to East Asia even though Japanese firms have built a regional production network over two decades. To address the puzzles, we propose new possible determinants of currency invoicing at the firm-level, based on an interview analysis with Japanese representative exporting firms, and then empirically test them by probit estimation using the unique dataset on the firms' currency invoicing choice by destination. Our novel findings suggest that a surprisingly low share of yen invoicing in Japanese exports even in the 2000s is attributed not only to the growing intra-firm trade through the active overseas operations of Japanese firms but also to the unique production/trade structure in Asia mainly established by Japanese electronics companies.

It has been argued that nominal appreciation of the yen vis-à-vis the U.S. dollar deteriorates the export price competitiveness of Japanese exporters. When the collapse of Lehman Brothers occurred in September 2008, for instance, the bilateral nominal exchange rate of the yen appreciated sharply vis-à-vis all currencies, which resulted in a large decline in Japanese exports. The yen has continued appreciating since then, staying around 76-79 yen vis-à-vis the U.S. dollar. A natural question is whether such appreciation in bilateral nominal terms has deteriorated the export competitiveness of Japanese export firms and whether the nominal yen appreciation has different effects across industries in Japan. It is well known that an effective exchange rate (EER), not bilateral nominal exchange rates, is a better measurement for considering the export firms' competitiveness in the global market. While both nominal and real EERs (REER) are now published by the Bank for International Settlements (BIS) and central banks, they are constructed by aggregate based trade weights. The industry-specific EERs are far more useful for considering the empirical importance of the exchange rate on producer profits in specific industries, though such industry-specific EERs are seldom available. The novelty of this study is to construct a new data set of the industry-specific EERs of the yen in both nominal and real terms on a daily basis from 2005 to the present to provide a better indicator for the international price competitiveness of Japanese exporters. By conducting simulation analysis, we examine whether recent fluctuations of the REER of the yen have been driven by domestic or foreign price changes. We also conduct a structural value at risk (VAR) analysis to investigate whether Japanese exports at the industry level are significantly affected by REER fluctuations, and which economic shocks most affect Japanese exports.

Gianluca BENIGNO is Associate Professor in the Department of Economics at the London School of Economics. He gained his PhD in International Macroeconomics from the University of California at Berkeley. He has published on exchange rate economics, international monetary policy cooperation, monetary and fiscal policy. He has consulted for the IMF and was a senior economist at the Federal Reserve Bank of New York and an economist at the Bank of England.

John DRIFFILL is Professor of Economics at Birkbeck College, University of London, specializing in international macroeconomics and labour economics. He is the creator of the Calmfors-Driffill hypothesis. Driffill received his MA from Cambridge University and his PhD from Princeton University. From 1976 to 1989 he lectured at Southampton University. Appointed professor at Queen Mary and Westfield College in 1990, he returned to Southampton University as Professor in 1992, and became Professor at Birkbeck in 1999. He is ranked top 5% author on the website IDEAS on several definitions of citations, and the Wu index.

Isabelle MÉJEAN has been an assistant professor at Ecole Polytechnique (Paris) since 2006 and an economist in the research department of the IMF in 2009-2010. Before joining Ecole Polytechnique, she held appointments at the CEPII (Centre d'Etudes Prospectives et d'Informations Internationales) and INSEE-CREST. She earned her PhD at the University of Paris 1-Panthéon-Sorbonne in 2006. Her research interests span international macroeconomics and international trade. She has published in the Journal of International Economics , the Journal of Urban Economics , and other academic journals.

Richard PORTES is Professor of Economics at London Business School is Founder and President of the Centre for Economic Policy Research (CEPR), Directeur d'Etudes at the Ecole des Hautes Etudes en Sciences Sociales, and Senior Editor and Co-Chairman of the Board of Economic Policy. His current research interests include international macroeconomics, international finance, credit default swap (CDS) markets and European integration. He has written extensively on international currencies, financial stability, globalisation, sovereign borrowing and debt, European monetary issues, European financial markets, international capital flows, centrally planned economies and transition, macroeconomic disequilibrium, and European integration.