RIETI Report July 2021

The dollar, the yen, or the renminbi? Invoicing currency choices by Japanese overseas subsidiaries

International trade has always been a difficult, albeit profitable, route for corporate growth. One source of concern for firms has always been exchange rate fluctuation and other currency-related risks, adding significant levels of complication to any overseas endeavor. Multinational enterprises have used many strategies to minimize the currency-based risks associated with trade, and because they are most directly affected by these pressures, their analysis, understanding and strategies can provide highly detailed insights into both the current situation and the potential future realities that are developing. In the July issue of the RIETI Report, we present "The dollar, the yen, or the renminbi? Invoicing currency choices by Japanese overseas subsidiaries" by Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato, Junko Shimizu, Taiyo Yoshimi.

Based on an empirical analysis of the survey data from the "Questionnaire Survey on the Choice of Invoice Currency by Japanese Overseas Subsidiaries" conducted in 2018 by RIETI, the authors determine various causes of a rapid increase in local currency invoicing and decline in US dollar invoicing. They examine the behavior of multinational enterprises based on their choice of invoice currency to provide context for future trends in trade and reserve currencies in the Asian region, with far-reaching implications.

This month's featured article

The dollar, the yen, or the renminbi? Invoicing currency choices by Japanese overseas subsidiaries

ITO TakatoshiColumbia University

KOIBUCHI SatoshiChuo University

SATO KiyotakaYokohama National University

SHIMIZU JunkoSenshu University

YOSHIMI TaiyoChuo University

Since the collapse of the Bretton Woods system in 1971, Japanese firms' profits have fluctuated with volatile exchange rate movements. From the early 1970s to the mid-1990s, the yen appreciated steadily, especially after the Plaza Accord in 1985. Japanese exporting firms have had to cope with large fluctuations within a yen appreciation trend. They have adopted various defensive measures. The use of financial instruments such as forward transactions proved to be effective only in the short run. Invoicing exports in yen should protect Japanese exporters' income, but importers may not agree to the arrangement. Trade conflicts incentivised exporters to set up ‘assembler subsidiaries’ in foreign countries, and this proved to be an effective hedging operation against currency fluctuations. Japanese exporters have developed sophisticated currency risk management methods since the 2000s, when the overseas production ratio increased sharply. Some choose the currency of destination country as the invoice currency for intra-firm trade between head offices in Japan and overseas subsidiaries. Some use the US dollar as the invoice currency throughout the production chain: from Japan to Asian countries where production takes place, to final destinations in the US and Europe. In earlier studies, we focused on the case of Japanese firms, showing that currency risk management depends on the size of the firm, sales destinations of subsidiaries, and the global market power of exporters (Ito et al. 2012, 2016, 2018).

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