The Share Of Currency Invoicing In Japanese Exports


02 Nov 2017

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In the following sub-chapter the author will refer to the research paper of Ito et al. (2010) who examined the exchange rate risk management of Japanese companies based on a questionnaire survey. The questionnaires needed for the survey were created and collected in cooperation with the Research Institute of Economy, Trade, and Industry (RIETI). The questionnaire was sent to all manufacturing firms listed on the Tokyo stock exchange in Japan in September 2009. The survey gathered various information on the firms about their foreign exchange rate risk management, pricing and invoicing strategy.

The Share of Currency Invoicing in Japanese Exports to the World

In Japan in 2009 among 217 manufacturing firms responded and results show that with 48.2% the share of yen-invoicing is still the largest however it is very closely followed by US dollar invoicing which is as high as 42.2 %. Regarding major currencies the share of euro invoicing hits just 7.1 % and the invoicing in other currencies reaches only 2.7 %. When looking more closely at the data focusing on the industries themselves, then it can be seen that the share of yen-invoicing is the very significant in the metal products, machinery, and transport equipment industry. Transport equipment industry does not contain the car manufacturers but hugely affects them due to the parts built into the cars are purchased from these companies situated in the named industry. As a consequence if the firms in the transport equipment industry invoice in yen and the currency appreciates then the costs of the parts built into the cars raises as well meaning the cost of the finished product is higher for the car manufacturer. When looking at the share of invoicing according to the size of the firm other trends could be clearly observed. Namely that according to the consolidated sales, it could be stated that the greater the firm size, the higher the share of US dollar invoicing is. On the other hand, the smaller the size of the firm is, the higher the share of yen invoicing. This also underpins the statement that car manufacturing firms, which are part of the leading industries in Japan are mostly using US dollar invoicing which makes them vulnerable to exchange rate fluctuations. Furthermore this is the reason why the foreign exchange risk management is being so crucial for car manufacturing firms in Japan.

To get a more precise view on the share of invoicing in different currencies some statements have to be summed up again. Firstly, that the invoicing in Japanese export worldwide is driven by the yen and the US dollar. The larger a firm is, the higher the share of US dollar invoicing and respectively the share of yen invoicing lower. This phenomenon gives the impression that arithmetic average of the invoicing share by currency could give an underestimated value regarding the actual share of currency invoicing in exports of Japanese firms. In order to prove this, a weighted average of share by currency is computed, taking total foreign sales of the firms into consideration to estimate the export of the Japanese firms.

As a result the arithmetic share of yen invoicing of 48% shrank to just 29% in weighted average which is difference of 19%. Subsequently, the 42% share of US dollar invoicing changed up to 54%, indicating a difference of 12 %. This result also supports the statements about huge firms as the representatives of the automotive industry having a high share of US dollar invoicing.

The number of the handling foreign currencies

In the survey of Ito et al. (2010) 227 firms were asked about how many kinds of foreign currencies they are using among 20 different kinds of foreign currencies. After examining the answers of the manufacturing firms the mean of the number of the handling foreign currencies was 3.1, meaning the average number of foreign currencies used nearly 3. When looking at more closely at the industry types, is could be seen that the mean of the number of the handling foreign currencies in the "Transport Equipment" industry is 4. This also shows the exchange rate exposure of the firms in the automotive industry however the forthcoming observations could be also interesting. The greater the firm is the higher number of foreign currencies it handles. For "Transport Equipment" it could be also seen very remarkably that the more foreign sales the firm has in comparison with the total sales the higher number of foreign currencies it handles.

Instruments of financial hedging

In the survey of Ito et al. (2010) 166 respondents were asked what kind of financial hedging instruments they use through the foreign exchange market. The result showed that 73.1% of the companies used some kind of hedging instruments. Looking into the details it can be seen that 95.2% of the firms used "Forward", 24.1% uses "Currency Option" and 3% uses "Other currency derivatives". When examining the industry breakdown it is shown that almost 40 % firms of "Transport Equipment" utilises "Currency Option" together with "Forward".

As the total amount of sales of a firm increases, in this situation meaning that the firm is larger, the ratio of using some kind of instruments of currency hedging meaning the use of "Forward" and "Currency Option" increases monotonously. From this it can be concluded that those companies which have great number of sales or foreign sales do use the instruments of currency hedging through the foreign exchange market.

The results show that approximately three quarters of the respondents utilise instruments of foreign exchange hedging through the foreign exchange market. Furthermore the more foreign sales a firm has, the more hedging instruments it uses in order to manage its foreign exchange exposure. These findings are also for the statement that firms within the Japanese automotive industry are utilising financial hedging tools to decrease the exposure towards currency risk.

Length of contract maturity of currency hedging

In the survey of Ito et al. (2010), firms were asked to choose among periods of "1 month", "3 months", "6 months" and "more than 6 months" given the option of multiple choices, in order to indicate the period of contract maturity of currency hedging. From the answers given by respondents it could be seen that 53.2% of them indicated "3 months" whereas 26.3% of them indicated "6 months" and 20.5% of them indicated "1 month" (20.5%). looking at the industries it is visible that the firms in the category of "Transport Equipment" chose mainly the option of "3months" and "6 months". Due to no clear tendency could be seen regarding the size of the firm it can be concluded that the members of the Japanese automotive industry are having relatively short-term contract regarding currency hedging. This could be due to the instability of the yen meaning that longer contracts could simply increase the risk binding a contract with not proper conditions for the firm.

Internal rule for the hedging ratio

Another interesting aspect which was examined by the survey of Ito et al. (2010) was how Japanese exporters hedge the foreign currency exposures. Do they have an internal rule or are they hedging discretionary? If they have an internal rule, then what is it? In order to get to this data, the existence of the internal rule was being examined. As it turned out, out of 212 responding firms, a bit more than a half, precisely expressed 54.2%, did have an internal rule and a bit less than a half, namely 45.8 % did not have any internal rule. Further examining those who did have some internal rule on the hedging, 41.7% indicated the answer of "around 50%" hedging and 23.5% indicated the answer of "around 100%" hedging. The answers clearly show that nearly one-quarter of the foreign currency exposure was hedged 100 %, and by adding up the two largest options indicated, it can be concluded that more than 60 % of the foreign currency exposure was hedged more over 50 %. After looking at the breakdown by industry, no clear correlation could be seen which indicates that this is a question of individual risk management decision.

When looking at the breakdown according to the size of the firm, where the size means the number sales, it is indicated that the larger the firm is, the more probable it is that it has an internal rule for hedging ratio. Those firms which indicated that they have no internal rule for the hedging ratio mostly gave the reasoning that the hedging ratio is defined always by taking the condition and prospect of the foreign exchange market into consideration.

As a sum up, it can be concluded that nearly half of respondents have an internal rule for hedging ratio of foreign exchange exposure. Furthermore firms with greater sales or greater exports are more likely to have an internal rule for the hedge ratio. As for the automotive industry no clear statement could be made however the results suggest that firms within the industry should have an internal rule for hedging ratio. The reason why it is hard to conclude anything is that these are not publicly available data and it may happen that one or more of the car manufacturing companies does not have any internal rule but hedges discretionary.

Operational hedging - Marry and netting

Next to financial hedging, operational hedging is also widely used by Japanese exporting firms and in order to use the benefits of it an overseas production network has been built by the firms. One of the widely used and popular operational hedging techniques is the so-called "marry and netting", which means to offset foreign receivables by foreign payables to decrease the foreign exchange risk to nearly zero. In the survey of Ito et al. (2010), out of 222 respondents 40.15% indicated the usage of marry and netting as a risk management technique. By examining answers in the industry breakdown, it is to be seen that in the group of "Transport Equipment" more than 50% of the respondents stated that they utilise this technique. When looking at target currencies it is shown that nearly all of the users of marry and netting, precisely 97.8%, did use it for the U.S. dollar and the second most popular currency by 41.6% was the euro. It is also visible that the named technique has been used in 85.4% of the cases on the trade between head office and subsidiaries.

The usage of marry and netting got larger as the total sales and the degree export become larger. It could be concluded that Japanese automotive firms are using the above mentioned technique in order to decrease their foreign currency exposure due to they have large opportunities in the area by having lots of subsidiaries around the world in many different states operating with many different currencies.

Pass-through of the exchange rate fluctuation to the export price

Exchange rate pass-through could sound as the easiest way to reduce however it is not as easy as it sounds because there are many factors to take into consideration in this case, one of them is the competitiveness of an increased priced product. The survey of Ito et al. (2010) examined whether firms pass through the fluctuations of the exchange rate to the export price, and if yes then how often. Out of 215 respondents, 51.2% chose the option that "It depends on the circumstances and management decision" and 32.1% replied as "No, we hardly pass through to the export price". Furthermore 16.7 % stated that they have an internal rule on pass through. The numbers above underpin that Japanese firms exporting cannot really pass through the changes in exchange rates into export prices easily even in the case of large fluctuation of foreign exchange rates. The validity of this could be clearly seen regarding the Japanese car manufacturing companies whereas by strengthening of the yen, they could not avoid decreasing profits however if the pass-through was able to work perfectly, decreasing profits could be avoided to large extent. Another examined aspect was the frequency of price revision and price changing at a model change. 137 firms replied and out of them 35% stated that they revise the export price "Once a half of year", 31.4% that revision takes place "Once a year" and according to the results of the survey 18.2% revises once in 3 months. By adding up the figures it shows that more than 80% of Japanese exporters revise their export price in a year.

Looking at industry breakdown it can be seen that in case of "Transport Equipment" around 90% of the respondents revised its export price within a year and around 70% at least once a half year., however it does not mean an automatic pass through as discussed later on.

On the question of an exchange rate pass through by model change, only 16.8% indicated that they do an exchange rate pass through in case of a model change. Even in the case of the category "Transport Equipment" the rate of a pass through at model changes remained lower than 25%.

When examining pass through during the period of the recent significant appreciation of the Japanese yen which started in 2008, some considerable figures are arising. Based on 209 respondents, it seems that 43.1% of the firms passed through costs of the strengthening currency in 2008 in contrast with the 56.9% which replied that they did not use any pass through. It may sound surprising according to the fact that firms also indicated that they do a regular price revision but as mentioned before it does not mean automatic pass through if the exchange rate changes. The proportion of the answers in the "Transport Equipment" sector is nearly the same as it is in general, meaning a bit less than half of the respondents did use the mentioned technique. This can be seen clearly at the annual reports of the firm as a decrease in profits only due to changes in exchange rates. Those who passed through the changes in foreign exchange rates, did it mainly in U.S. dollars meaning 84.4% in the responses followed by the euro 47.8% share in responses due to the possibility of multiple choices.


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