The dollar exposure of Japanese companies

The bulk of Japanese exports and imports are denominated in U.S. dollars ra ther than Japan's local currency, the yen. The consequences of dollar invoi cing depend importantly on the extent to which Japanese companies hedge the ir dollar exposures. If they fully hedge their dollar exposures, then the c hoice of invoicing currency will not influence the yen profits of Japanese companies. This paper examines the degree to which Japanese companies hedge by estimating their exposure to movements in the dollar. Using Japanese st ock market data and an international version of the CAPM model I estimate t he extent to which Japanese company returns are correlated with changes in the yen-dollar exchange rate. The results suggest many Japanese companies a re indeed exposed to yen-dollar movements and that dollar appreciations gen erally are positively correlated with firm returns. Since over the period 1 984 to 1995, the dollar depreciated by 36% relative to the yen, it follows that the values of Japanese companies fell as a consequence of their dollar exposure. (C) 1998 Academic Press.