Determinants of Currency Invoicing in Japanese Exports: A firm-level analysis

This paper examines the firm-level pricing behavior of Japanese exports to present new evidence and determinants of an invoice currency. We interviewed twenty-three major Japanese exporting firms to collect information on their currency invoicing behavior and also on their explicit policy/strategy for choosing an invoice currency. New findings in the destination breakdown of the share of currency invoicing are presented in four major exporting industries: automobile, electric machinery, general machinery and electronic component industries. We also propose six possible determinants of currency invoicing in Japanese exports: (i) intra- or inter-firm trade; (ii) cost of exchange rate hedging; (iii) the degree of market competition and differentiation of exporting products; (iv) the share of exporting products customarily traded in U.S. dollars; (v) exports from an Asian production base to the U.S. market; (vi) explicit policy of choosing a specific currency for invoicing.



By constructing a firm-level dataset obtained from annual securities and financial reports of each sample firm, we conduct both cross-section OLS and probit estimation to empirically examine the determinants of currency invoicing at a firm-level export. Our novel findings are three-fold. First, importers' currency invoicing is prevalent in Japanese exports to developed countries. Since most exports of sample firms are destined for local subsidiaries that face severe competition in the local markets, Japanese parent firms have a strong tendency to take on exchange rate risk by invoicing in the importer's currency, which is consistent with the pricing-to-market (PTM) behavior discussed in the literature. Second, a large share of exports of electronics products that are customarily invoiced in U.S. dollars promotes U.S.-dollar invoicing even in exports to non-U.S. markets. Third, although Japanese firms have shifted their production bases to Asian countries, exports from these Asian bases tend to be invoiced in U.S. dollars as long as the final destination market is the United States. Given that U.S.-dollar invoicing is prevalent in Asia, both Japanese and Asian firms take exchange rate risks against the U.S. dollar. Establishing a common currency basket in Asia is worth considering to mitigate the exchange rate risk for both Japanese and Asian firms.