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

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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