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 1

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. 2

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. 3

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 4

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. 5

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. 6

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

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

9. Exchange rate and Stock price (2011 ) 9

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 10

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

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 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 http://dx.doi.org/10.1787/5k9cvpldq533-en 12