Export Similarity, FDI and Yen-Synchronization of East Asian Currencies : Regime Switching Regression Model and Microstructural Analysis

Using a regime-switching regression model, we provide evidence of the synchronization of East Asian (Korea, Thailand, the Philippines, Indonesia, and Taiwan) currencies-dollar exchange rates with yen dollar exchange rates and report that the export similarity index and FDI between Japan and this group of countries are two main determinants of yen synchronization in the region. Our estimation results are robust with different econometric techniques.We also investigate the microstructural characteristics of yen synchronization and show that the synchronization period persists once it has begun and the volatility of dollar exchange rates is higher during synchronization than during de-synchronization. Finally, we conclude that those findings support the idea of a so-called “yen bloc”. However, as opposed to traditional arguments, we show that yen synchronization is driven not by increased exports and imports in this area but by increased export similarity in the region and FDI between Japan and East/Southeast Asian countries