Trade Adjustments to Exchange Rate Changes by Japanese Manufacturing MNEs: Intra-firm and arm's length transactions
This paper examines how Japanese manufacturing multinational enterprises (MNEs) adjust to exchange rate changes. Using the micro-data of Japanese manufacturing MNEs from 1994 to 2010, we find that exports tend to respond to exchange rate changes, in particular when wholly or majority-owned affiliates are dominant among their foreign affiliates and when intra-firm trade ratios are higher. Moreover, the responsiveness to exchange rate changes is higher for intra-firm exports than for total exports. The results suggest that Japanese manufacturing MNEs with greater foreign operations under their own corporate control would more fully absorb shocks of exchange rate movements by adjusting intra-firm transactions. We do not find such tendencies for imports, however. Our results also show that, among all manufacturing sectors, the exporting/importing responsiveness is lower in the electric machinery sectors and higher in the transport equipment sectors due to different types of international division of labor. Furthermore, our results show that the size of the firm does not matter in terms of the responsiveness for total exports, although it does for intra-firm exports only.