Mr. Rintaro Tamaki, Deputy Secretary-General, OECD SEMINAR ON EXCHANGE RATES AND TRADE

1. Remarks on the role of the exchange rate and structural policies in correcting current account imbalances Mr. Rintaro Tamaki, Deputy Secretary-General, OECD SEMINAR ON EXCHANGE RATES AND TRADE 27-28 March 2012

2. Impact of exchange rates on trade There is no consensus on: • Methodology to measure exchange rate alignment • Impact of exchange volatility on trade • Magnitude of the impact of exchange rates on trade flows.

3. Impact of exchange rates on trade is unclear due to: • Potentially high import content of exports in globally integrated economies • Price elasticities of demand differ across products • Different price transmission mechanisms according to product and market • Hedging and other risk management practices differ by size of firm.

4. Global imbalances widened prior to the crisis (Sum of absolute current accounts in US$, as % of area-GDP) Global current account imbalances Euro area current account imbalances Source: OECD Economic Outlook, November 2011

5. Reforms that are desirable on welfare, equity or efficiency grounds may also reduce global imbalances • Developing social welfare systems in China and other Asian economies would reduce precautionary saving, so moderating current account imbalances in surplus countries. • Removing competition-unfriendly product market regulation could encourage capital spending in countries like Japan and Germany. • Financial market reforms may relax borrowing constraints in emerging economies and thus help to reduce the high saving rates. • Removing policy distortions that encourage consumption such as tax deduction of interest payments on mortgages might increase household saving in some countries including the United States. + More ambitious fiscal consolidation would reduce imbalances because government indebtedness is typically higher in deficit countries.

6. A scenario analysis shows that fiscal consolidation combined with structural reforms can substantially reduce global imbalances Absolute sum of global current account balances as % of world GDP Note: The size of imbalances is measured as the sum of the absolute current balance-to-GDP ratios, weighted by 2009 GDP (in current USD). The starting values are based on the current-account-to-GDP ratios in 2009.

7. The effect of structural reforms and fiscal consolidation could markedly reduce external imbalances in some euro area countries Fiscalconsolidation Fiscal consolidationand structural reforms

8. Export-led Recovery from 2002 to 2007 Change of consumption & export

9. Exchange rate and Stock price (2011～)

10. Sensitivity of stock price to exchange rate (1-year beta) Appreciation of Yen/Euro correlated with Lower stock prices Appreciation of Yen/Euro correlated with Higher stock prices

11. The current account balance of Japan (% of GDP)

12. References • OECD (2011), “The Impact of Structural Reforms on Current Account Imbalances”, OECD Economics Department Policy Notes, No. 3. • Kerdrain, C., Koske, I. and I. Wanner (2010), “The Impact of Structural Policies on Saving, Investment and Current Accounts”, OECD Economics Department Working Papers, No. 815. • Huchet-Bourdon, M. and J. Korinek (2011), “To What Extent Do Exchange Rates and their Volatility Affect Trade?”, OECD Trade Policy Working Papers, No. 119, OECD Publishing. http://dx.doi.org/10.1787/5kg3slm7b8hg-en • Huchet-Bourdon, M. and J. Korinek (2012), “Trade Effects of Exchange Rates and their Volatility: Chile and New Zealand”, OECD Trade Policy Working Papers, No. 136, OECD Publishing. http://dx.doi.org/10.1787/5k9cvpldq533-en