Junko Shimizu

New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi

We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-a-vis the U.S. dollar from 1992 to 2008. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect Chinas processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2008. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2008, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 65 percent from the year 2000 level. Such sharp appreciation of the EER corresponds to the dramatic increase in Chinas current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.

Currency Invoicing Decision: New Evidence from a Questionnaire Survey of Japanese Export Firms

There have been only a few studies that empirically examine the firms decision on price setting or currency invoicing in international trade. This paper is the first study that conducts the questionnaire survey with all manufacturing firms listed in Tokyo Stock Exchange concerning the choice of invoicing currency at a firm level. Questionnaires were sent out to 920 Japanese firms in September 2009 and 227 firms responded. We present the new firm-level evidence on the choice of invoicing currency by destination and by type of trading partner, and also the share of invoicing currency of Japanese production subsidiaries in Asia. By conducting cross-section analysis, we found the following evidences: (1) highly differentiated goods and/or strong competitiveness of the products promote Japanese yen invoicing in exports to all countries, (2) larger share of intra-firm trade in exports promotes importers currency invoicing in exports to advanced countries, and (3) the production-sales networks of Japanese firms whose Asian production subsidiaries export their final products to other countries/region promote US dollar invoicing in exports to Asian countries. JEL No. F23, F31, F33

Asian Monetary Unit (Amu) As A Surveillance Indicators For Regional Monetary Cooperation

Ogawa and Shimizu (2005) proposed an Asian Monetary Unit (AMU), which is a common currency basket composed of ASEAN plus three Asian currencies, and AMU Deviation Indicators (AMU DIs), which indicates deviations of each Asian currency in terms of the AMU compared to the benchmark rate. In this paper, we use daily and monthly data of AMU and AMU DIs to examine their usefulness as a surveillance indicator for monetary cooperation in Asia. We find that an AMU peg system stabilizes the trade-weighted exchange rates within Asia and that AMU DIs warn of misalignments of and between Asia currencies.

A currency basket and future exchange rate arrangements in Asia

Abstract Due not only to a dominant role of the US dollar in regional trade and financial transactions but also to de facto US dollar pegged exchange rate policy, Asian countries cannot avoid exchange rate risks between their own currency and the US dollar. In recent years, however, the Chinese government has actively promoted the Renminbi (RMB) internationalisation especially in international trade. In December 2015, China introduced a new exchange rate index against a basket of 13 trade-weighted currencies, which can be considered a major turning point from the US dollar standard toward a more flexible currency basket system. However, the estimated implicit basket weights reveal that several Asian economies still tend to stabilise their currencies against the US dollar, while Malaysia and Singapore have stabilised their currencies against RMB in recent years. Since the internationalisation of local currencies and regional monetary arrangements are typically facilitated with each other, further progress of RMB internationalisation is expected to promote a leading role of China in establishing regional exchange rate policy coordination.

Managing Currency Risk

This book demonstrates how exporters’ decisions regarding choice of invoice currency can be influenced by many factors including firm size, product competitiveness, intra/inter-firm trades, and the geography of export destination. The aim is to enhance our understanding of exporters’ behavior in terms of managing currency risk. It contains detailed research and insightful data focusing on Japanese exporters and shows how they face an important trade-off in choosing the invoice currency. If exports are invoiced in yen, then exchange rate fluctuations will pass through to retail prices ultimately affecting sales volumes. However, if they choose to invoice in the importer’s currency, then sales volumes are largely unchanged.

Industry-specific Exchange Rate Volatility and Intermediate Goods Trade in Asia

This paper empirically analyzes the effect of exchange rate volatility on intra-Asian trade of intermediate goods at an industry level by constructing a new dataset of the industry-specific bilateral real exchange rate. As the final processed exports are destined for countries outside the Asian region, both the exchange rate and world demand are considered as a possible driving force in the cross-border fragmentation and processing trade. It is found that, in contrast to the recent studies, the exchange rate impact on intra-regional trade differs across industries. The exchange rate volatility has negative and significant effects only on the general machinery industry and a part of the electric machinery industry with more differentiated products, even when taking into account the worlds demand for the final processed exports. These findings are supported by various kinds of exchange rate volatility in the short- and long-run. Our empirical results suggest that the different impact of the exchange rate volatility across industries is tied to the characteristics of traded goods in respective industries.

Comment Paper to Chapter “The Exchange Rate Regime as a Tool to Advance Reform: Success or Failure?”

The main value of this paper is that it attempts to explain the euro as a potential tool to advance reform in Europe. As the euro was introduced to progress further necessary reform by removing monetary and fiscal policy autonomy and by introducing price transparency, it would have been successful if reform had progressed and economies converged. Unfortunately, only a few countries, Germany for example, have been successful. If the institutional reforms succeed in bringing about reforms to increase the competitiveness of all members, then the euro can still fulfill its role. This will be the true economic test as to whether the euro will survive or not. However, Prof. Kaji predicts that many countries will, sooner or later, choose a similar arrangement, for example, pegging the euro or “a kind of euro”, even if the euro failed this time. Why will they do so? Because, for better or worse, the European economy is closely integrated. In this decade, the world economy has moved to a “new global regionalism” in North America, East Asia, Latin America, the Gulf States, and Africa. The problems that face euro area countries issue a grave warning about the important role of exchange rate. We realize how strong governance affects the effectiveness of economic policies, and in this sense, this paper is worthwhile reading for all. Regarding this paper, I would like to clarify some points as follows.

New estimates of the equilibrium exchange rate

We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-a-vis the U.S. dollar from 1992 to 2008. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect Chinas processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2008. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2008, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 65 percent from the year 2000 level. Such sharp appreciation of the EER corresponds to the dramatic increase in Chinas current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.

New Estimates of the Equilibrium Exchange Rate: The Case for the Chinese Renminbi: RENMINBI EQUILIBRIUM EXCHANGE RATE

We estimate the equilibrium exchange rate (EER) of the Chinese renminbi (RMB) vis-a-vis the U.S. dollar from 1992 to 2008. In contrast to the recent empirical studies on the EER employing a large cross-country analysis, we focus on the supply side real factors in estimating the EER by extending the Yoshikawa (1990) model. To better reflect Chinas processing exports in the context of growing intra-regional trade in Asia, we incorporate in the empirical analysis the source country breakdown data on import prices and input coefficients of intermediate inputs by constructing an annual new International Input-Output (IIO) table for the period from 1992 to 2008. The results show that the EER of Chinese RMB appreciates sharply from 2005 to 2008, suggesting that the current RMB exchange rate has been substantially undervalued and should be revalued by 65 percent from the year 2000 level. Such sharp appreciation of the EER corresponds to the dramatic increase in Chinas current account surplus from the mid-2000s, especially against the United States, which is ascribed to the significant improvement of both labor and intermediate input coefficients in China.