The Choice of an Invoicing Currency by Globally Operating Firms: A Firm‐level Analysis of Japanese Exporters

Abstract

The purpose of this paper is to identify determinants of currency invoicing among Japanese exporting firms with firm-level data, overcoming the usual limitation of data availability, by interviewing 23 representative Japanese firms in three industriesautomobile, electrical machinery and general machinery. Major findings are as follows. First, invoicing in the importer's currency is prevalent in exports to advanced countries, because most of exports by the globally operating firms are destined for local retail subsidiaries of respective firms, which conforms to the pricing-to-market behaviour discussed in the literature. Second, Japanese firms that export highly differentiated products or have a dominant share in the global market tend to invoice their exporting products in the yen both to advanced countries and to developing countries. Third, although Japanese firms have shifted their production bases to Asian countries, exports from Japan to these Asian production subsidiaries tend to be invoiced in US dollars as long as the final destination market is in the USA.

Industry‐specific exchange rate volatility and intermediate goods trade in Asia

“…As discussed in Ito et al . (), general machinery products tend to be differentiated, and arm's length trade is a prevailing pattern in this industry.…”

“…Engines are typically considered to be differentiated products, and Japanese firms tend to export these products from Japan to Asian subsidiaries by invoicing in the yen, 11 meaning that the exchange rate volatility is likely to have significantly negative impact on trade of intermediate goods. As discussed in Ito et al (2012), general machinery products tend to be differentiated, and arm's length trade is a prevailing pattern in this industry.…”

“…Once a production network is established, intra-firm trade will grow wherein its relation-specific nature may mitigate the exchange rate risk of intermediate goods transactions along the production chain. This is particularly the case for larger MNCs with an oligopolistic nature that tend to expand global production and sales networks and where exchange rate risks from their trade transactions are concentrated and efficiently managed in their head office (Ito et al, 2012). Another key factor is the choice of invoice currency.…”

“…Another key factor is the choice of invoice currency. Asian trade is typically invoiced or contracted in US dollars rather than in local currencies (Sato, 2003;Ito et al, 2012). As long as both exports and imports are invoiced in US dollars, MNCs in Asia are less affected by the exchange rate volatility, at least in nominal terms.Recent empirical studies, however, have found that the exchange rate volatility has significantly negative effect on intra-Asian trade (e.g.…”

The International Price System

“…Gopinath et al (2010) use BLS import price data to document that dollar pricing is more common in sectors classified as producing more homogenous goods as compared to differentiated goods (following the Rauch (1999) 49 Goldberg and Tille (2008) find a similar result when they examine aggregate invoicing data for 24 countries, that is more homogenous goods are priced everywhere in a common currency, dollars, and this is less true for differentiated goods. Ito et al (2012) survey Japanese exporters who report using yen invoicing when they export highly differentiated products or when their product has a dominant share in world markets.…”