(Luận văn) determinants of foreign exchange rate, case of vietnamese dong and japanese yen

The main research question identifies 1 Which Vietnamese and Japanese macroeconomics variables determine the VND/JPY exchange rate; 2 What the role of the Japanese Yen plays in the econo

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS OF FOREIGN EXCHANGE RATE: CASE OF VIETNAMESE DONG AND

JAPANESE YEN

BY

Mr TRAN VUONG TU

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, MAY 2013

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS OF FOREIGN EXCHANGE RATE: CASE OF VIETNAMESE DONG AND

JAPANESE YEN

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

Mr TRAN VUONG TU

Academic Supervisor:

PhD NGUYEN HOANG BAO

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This thesis was written at the University of Economics Ho Chi Minh City In addition,

it was completed in October 2013 During the process of writing, the paper has gained

a lot of experience in writing a thesis and in the area of foreign exchange rate analysis

During the three months of writing this thesis, several persons have contributed in the different ways to the quality of this thesis and the paper would like to take this opportunity to thank them

Firstly, the paper would like to thank our supervisor PhD Nguyen Hoang Bao for all the help, guidance, and support The paper would also like to express gratitude to all professors of the Vietnam-Netherlands Program for the Master in Development Economics and the classmates who offer to us some useful suggestions Finally, we express special thank to our families and partners for their love and support

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Exchange rate not only plays a very important role in the economic policy of the government of Vietnam in the process of integration into the world economy, but also effects many exporters, importers, foreign investors, and commercial banks in the international transaction

Japanese economy plays as important as having mainly economic relations with Vietnamese economy in the export-import trade, foreign direct investment (FDI) capital, official development assistance (ODA), etc However, Vietnam government applies the floating exchange rate policy between Vietnamese Dong and the Japanese Yen

Therefore, the fluctuations of Vietnamese-Japanese exchange rate might great impact

on the trade and investment The exporters and importers of two countries, Japanese investors, the commercial bankers that having international settlement with Japanese Yen, are in need of defending the exchange rate risk volatility of the exchange rate pairs

Our study enhance on analyzing and predicting the fluctuations of Vietnamese-Japanese exchange rate The main research question identifies (1) Which Vietnamese and Japanese macroeconomics variables determine the VND/JPY exchange rate; (2) What the role of the Japanese Yen plays in the economic relationship between Vietnam and Japan and (3) Which performance of the multiple regression model and the auto-regressive integrated moving average model are in predicting the VND/JPY exchange rate Methodology focuses on the multiple regression model to define the determinants

Moreover, our study test the reliability in the prediction between multiple regression model and auto-regressive integrated moving average model to examine the VND/JPY exchange rate data Hence, auto-regressive integrated moving average model plays better forecasting performance

Key Words: VND/JPY exchange rate, multiple regression model, auto-regressive integrated moving average (ARIMA), Vietnamese Dong, Japanese Yen, Vietnam, Japan

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TABLE OF CONTENTS

Table of contents 1

List of tables 3

List of figures 3

List of abbreviations 4

1 Chapter one: Introduction 5

1.1 Background of study 5

1.2 Research question 7

1.3 Research objective 8

1.4 The outline of paper 8

2 Chapter two: Literature review 9

2.1 Theoretical framework 9

2.2 Empirical Studies 14

3 Chapter three: Methodology 17

3.1 Data 17

3.2 The fundamental regression model 18

3.3 Box-Jenkins’ auto-regressive integrated moving average model (ARIMA) 19

4 Chapter four: The impact of the Japanese Yen in the economic relationship between Vietnam and Japan 23

4.1 Overview of the Vietnamese foreign exchange policy 23

4.2 Overview of the Japanese foreign exchange policy 25

4.3 The impact of the Japanese Yen in the trade, investment, and finance between Japan and Vietnam 27

5 Chapter five: Results: Descriptive data, multiple regression and ARIMA 32

5.1 Descriptive statistics 32

5.2 The results and summary of findings 34

5.3 Forecasting performance 38

6 Chapter six: Conclusions 41 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

6.1 Summary of study 41

6.2 Policy implication 42

6.3 Limitation of our study and suggestion for further research 42

References 44

Appendix A 50

Appendix B 52

Appendix C 60

Appendix D 70 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

LIST OF TABLES

Tables 2.1 Description of economic indicators 12

Tables 2.2 Empirical Studies 14

Tables 3.1 Variable sources 17

Tables 3.2 List of variables 18

Tables 3.3 The autocorrelation function (ACF) and the partial autocorrelation function (PACF) patterns summary 20

Tables 4.1 Global foreign exchange reserves 26

Tables 4.2 History of the Japan's interventions in the foreign exchange rate 26

Tables 5.1 Description of the variables 32

Tables 5.2 Correlation test and Anova F-test 33

Tables 5.3 The result regression model 34

Tables 5.4 Wald Test 35

Tables 5.5 Unit Root Test 36

Tables 5.6 ARIMA statistical results 37

Tables 5.7 The VND/JPY forecasting performance 38

Tables 5.8 Testing of forecasting ARIMA 39

Tables 5.9 The advantages and disadvantages in the multiple regression and Auto-regressive integrated moving average model (ARIMA) 40

LIST OF FIGURES Figure 3.1 Box Jenkins Methodology for ARIMA modeling 19

Figure 4.1 Value of trade balance Vietnam-Japan 28

Figure 5.1 The plot of the monthly VND/JPY exchange rate 36 tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

LIST OF ABBREVIATIONS S.No abbreviation Description

2 ARIMA Auto-regressive integrated moving average

5 CIEM Central institute for economic management

9 GSO General statistics office of Vietnam

13 JVEPA Japan-Vietnam economic partnership agreements

14 LCO (WTI oil) Light crude oil (West Texas intermediate oil)

15 MFAJ Ministry of Foreign Affairs of Japan

17 MPIV Ministry of Planning and Investment of Vietnam

29 Vietcombank Joint stock commercial bank for foreign trade of Vietnam

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CHAPTER ONE: INTRODUCTION This paper presents the research projects including studies of users, target research to identify the factors that influence the exchange rate between the Vietnamese Dong and Japanese Yen Accordingly, fluctuations in foreign exchange rate have great impact on Vietnamese government, the exporters, importers, commercial banks, and Japanese investors In addition, they have a need for the research prediction on foreign exchange rate Therefore, our research focuses on analyzing and predicting the fluctuations in VND/JPY exchange rate by multiple regression and auto-regressive integrated moving average (ARIMA) Our finding is what determinants of VND/JPY exchange rate in Vietnam

1.1 Background of study Vietnam economy increasingly integrated into the world economy in term of trade and investment Therefore, exchange rate plays a very important role in the economic policy of the Vietnamese government Moreover, many exporters, importers, foreign investors, and commercial banks, that make the international transactions, are impacted by the fluctuations in foreign exchange rate Indeed, many countries fall into economic hardship due to unstable exchange rate, such as trade deficit, high inflation, increasingly foreign debts, etc Therefore, the exchange rate has attracted special attention to the economists, politicians for the study and research In addition, the exchange rate has become an important topic, which is discussed and analyzed on over the world Many researches have done in order to predict and analyze the fluctuations in foreign exchange rate

An opening economy is towards the integration with the world economy as well as Vietnamese economy According to the report on April 2013, Vietnamese Ministry of Planning and Investment, issued "Comprehensive evaluation of Vietnam’s socio-economic performance five years after the accession to the World trade organization"

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report1 This report has identified the economic policy focused on foreign trade of Vietnam is following the trend of multilateral development cooperation The International trade of Vietnam and the rest of world become very exciting However, the Vietnam’s exchange rate policy used to concentrate on implementing the pegged exchange rate policy between Vietnamese Dong and U.S Dollar, and keep floating alongside most of other exchange rates It creates some difficult, risky factors for exporters, importers, commercial banks, and foreign investors during the international payment process for non-dollar currencies such as the Japanese Yen, Euro, and Australian Dollar etc Indeed, the General statistics office of Vietnam on the international trade in Vietnam in 2012 said that Vietnam has many international economies Beside the United State of America as Vietnam’s largest trade partner with two-way trade turnover reached US$ 27.6 billion, Vietnam still has many key trading partners such as Japan (approximately U.S Dollar 24.6 billion, 11.1% of Vietnamese total trade)2, South China (U.S Dollar 19.5 billion) and the Association of Southeast Asian Nations (ASEAN)

Japan, in particular, is a country having highly economic relations with Vietnam in many fields including export-import, foreign direct investment capital, Official development assistance, and etc According to the Department of Foreign Affairs under the Ministry of Planning and Investment, in the years 2012-2013, Japan continues to be the largest donor of official development assistance (ODA) for Vietnam with 40%3 of total official development assistance (ODA) commitments to Vietnam According to the Foreign investment agency under the Ministry of Planning and Investment, in 2012, Japan was the biggest foreign direct investment investor in Vietnam, accounted for 34.2%4 of total investment in Vietnam Thereby, indicating

1 ‘Comprehensive evaluation of Vietnam’s socio-economic performance five years after the accession to the World Trade Organization’ 2013, report 2013, Central institute for economic management, Vietnamese Ministry of Planning and Investment

2 General statistics office of Vietnam 2013, Vietnam Export-Import report 2011-2012, Vietnam

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the exchange rate fluctuations between the Vietnamese Dong and the Japanese Yen have great impact on Vietnam's economy in general and the exporters, importers, banks and Japanese investors in particular

In studies related to the exchange rate between Vietnamese Dong and foreign currencies, normally only focused on fixed exchange rate policy between Vietnamese Dong and the U.S Dollar There is virtually no study related to the pairs of floating exchange rate between Vietnamese Dong and the Japanese Yen or Euro or Pound

Considering the trade, economic relations, and investment cooperation, the researches

on the fluctuations in VND/JPY exchange rate plays an important role in the trade policy between Vietnam and Japan, in the planning for investment reception between Vietnam and Japan (official development assistance and foreign direct investment) It would be clearly explain in chapter five In addition, the exporters, importers, Japanese investors, and commercial banks have the international settlement with Japanese Yen They are in need of defending the exchange rate risk volatility of the exchange rate

Most of all, our study focuses on the analysis of determinants of foreign exchange rate Moreover, our study enhances for using the fundamental analysis to define the determinants of the VND/JPY exchange rate by the multiple regression model and using the Auto-regressive integrated moving average to examine the VND/JPY exchange rate Absolutely, our study investigates to find out what determinants of VND/JPY exchange rate in Vietnam Besides that, our study further clarifies the role

of the Japanese Yen in the economic relationship between Vietnam and Japan

1.2 Research question Hence, our study can suggest three-research questions as follows: (1) Which Vietnamese and Japanese macroeconomics variables determine the VND/JPY exchange rate; (2) What the role of the Japanese Yen plays in the economic relationship between Vietnam and Japan and (3) Which performance of the multiple tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

regression model and the auto-regressive integrated moving average model are in predicting the VND/JPY exchange rate

Our study enhances the multiple regression model and the auto-regressive integrated moving average model to econometric test the VND/JPY exchange rate

1.3 Research objective Our study identifies three objectives as follows: (1) to find out which macroeconomics variables determine the VND/JPY exchange rate; (2) to identify the role of the Japanese Yen in the economic relationship between Japan-Vietnam and (3)

To test forecasting performance of the multiple regression model and the regressive integrated moving average model in the VND/JPY exchange rate

auto-The exporters, importers, Japanese investors, and commercial banks, that have the international settlement with Japanese Yen, are our research objective They always face to the exchange rate risk volatility of the exchange rate Therefore, they are interested in which macroeconomics variables determine the VND/JPY exchange rate and how to use the econometric model in predicting the VND/JPY exchange rate

1.4 The outline of paper Our study is divided into five chapters as: chapter one briefs on the research projects including studies of users, target research to identify the factors They influence the exchange rate between the Japanese Yen and Vietnamese Dong Chapter two presents many theories as the foundation for the study including the analysis of the basic index

of both countries (industrial index, consumer price index, interest rates, value of balance trade, prices of rice and prices of light crude oil) and auto-regressive integrated moving average model (ARIMA) Chapter three presents research methods and research data Chapter four shows overview the foreign exchange rate policies of the two countries Vietnam and Japan Moreover, it highlights the influence of the Japanese Yen in relation to economic and trade between Vietnam and Japan Chapter tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

CHAPTER TWO: LITERATURE REVIEW Literature review is essentially an organized collection of theoretical framework and empirical studies Chapter two presents theories as the foundation for the study There

is fundamental and technical analysis Fundamental analysis shows the multiple regression model to examine macroeconomic variables of both countries (industrial index, consumer price index, interest rates, value of balance trade, prices of rice, and prices of international crude oil) Technical analysis tests the VND/JPY exchange rate

by auto-regressive integrated moving average (ARIMA)

2.1 Theoretical framework Two main theoretical frameworks will be discussed in this study: (1) Fundamental analysis is based on a thorough examination of macroeconomic variables that have an impact on the currency; (2) Technical analysis is the opposite of fundamental analysis solely focuses on prices, and movements in the past, ignoring the economic factors and policies Technical analysis focuses on price action It is based on the history of the exchange rate It is expected that all the essential information is already included

in the price Our study enhances the Auto-regressive integrated moving average model in technical analysis

2.1.1 Fundamental analysis on the multiple regression models Faust, Rogers, and Wright (2003) emphasize that the exchange rates under a floating exchange rate depend on the demand and supply of a currency exchange rate If the delivery of the currency exceeded demand, the devaluation of this currency and vice versa Depending on the asset market model shows "the exchange rate between two currencies represents the price that balances for shipments and demand for foreign currency denominated assets." the expectations of the foreign exchange market and changes in the direction of expectations, changes in demand and supply of money and the exchange rate They suggest two important theories: (1) purchasing power parity and (2) international Fisher effect

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The theory of purchasing power parity (PPP) initially formed by Cassel (1918), employs the long-term equilibrium exchange rate between the two currencies to balance purchasing power in their home countries Therefore, the PPP exchange rate

is the rate at which the two currencies are equal by removing the discrepancies in the price levels between nations There are two versions of purchasing power parity theory: (1) the absolute version states that when converted into a common currency, the price levels in the world should be equal In other words, a unit of common currency at home should have the same purchasing power worldwide; (2) the relative version says that depending on the changes in the price levels between the two countries the exchange rate between home currency and foreign currency will be corrected to reflect the changes in the price levels5 The relative version can be presented as follows:

t f

t h t

i

i e e

) 1 (

) 1 (

et is the spot foreign exchange rate in period t;

e0 is the foreign exchange rate at the beginning of the period;

ih is the inflation rate in the home nation; and,

if is the inflation rate in the foreign nation

The purchasing power parity is represented by the following approximation

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Rationally, purchasing power parity is that higher inflation may lead to a currency that should depreciate against a country with low inflation6 Moreover, Zhang and Wu (2011) suggest that the price of good and products that the country exports or imports are maybe affected the purchasing power Hence, purchasing power parity suggests some economic variables that affect the change of the exchange rate such as the inflation, trade balance, the industrial, purchasing power and the price of mainly export or import good

The generalized version of impact international Fisher effect (IFE) said that an interest rate higher than the share with a low inflation must withstand the currency with a high annual rate of inflation Differently, purchasing power parity means that rates will move; match the changes in the differential rates of inflation The combination of these two conditions is the effect of international Fishermen

International Fisher effect can be specified as:

(2.3)

where

rh is the interest rate in the home country;

rf is the interest rate abroad;

E(et ) is the expected foreign exchange rate at period t; and,

e0 is the foreign exchange rate at the beginning of the period t

Speculators will receive a positive return when they sell the currency of economy X and buy the currency of economy Y, if the interest rate in the economy Y is lower than in economy X They expect the appreciation of the currency of economy Y This purchasing of currency of economy Y speculated or invested in high-yielding assets

The result is appreciation of the currency by the increasing demand In the rational,

6 For example, if the rate of inflation in the country X is 15% and the inflation in country Y is 7%, the currency

of country Y maybe appreciate roughly 8% compare of the currency of the country X.

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the lower interest rate of a currency leads to a lower inflation rate It affects the price

of currency Hence, the international Fisher effect said that interest rates have a significant effect on the exchange rate

Based on above theories, many economic indicators seem to be important to explain movements in exchange rates Historically, Zhang and Wu (2011) suggested many indicators in examination of AUD/JPY exchange rate They were the gold price, oil price, Australian employment data, Australian consumer price index (CPI), Australian gross domestic product (GDP), Australian trade balance, Royal Bank of Australia (RBA) rate decisions, Japanese consumer price index (CPI), Japanese trade balance, Japanese industrial production index, and Bank of Japan (BOJ) interest rate decisions

Therefore, our study makes decision for applying some economic indicators to test the fluctuations in VND/JPY exchange rate as follows:

Table 2.1: Description of economic indicators

Economic indicators7

Economic mechanism through which each variable might impact on the foreign exchange rate

1 The price of rice

There was a high percentage of total exports of commodity products in account for Vietnam export, world prices may help explain the price movements of long-term exchange rate this product as the Vietnamese Dong

Sometimes this means that entrepreneurship is Vietnamese Dong just like trading rice Vietnam is the second largest producer of rice and the Vietnamese Dong has generally a positive correlation with the price of rice, which in the case of an increase in the prices of rice, Vietnamese Dong tends to grow.

2

The price of light crude oil (West Texas Intermediate oil)

The Japanese economy is heavily dependent on Light crude oil, so import price fluctuations affect the value of the Japanese Yen As a rule of Japanese Yen is only a negative correlation with the price of crude oil High oil prices increase the cost of goods and services, as well as slowing the growth of the Japanese economy As a rule, if the oil price appreciates, the Japanese Yen depreciates

3

Vietnamese index-industrial production (IIP)

Index of Industrial Production (IPP) is basically the growth in industrial production of the country It has a close relation to the growth of Gross domestic product (GDP) to assess the economic development of an economy Accordingly, IIP may affect the exchange rate of the domestic currency against foreign currencies In Vietnam, it was published by the General Statistics Office of Vietnam

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4

Vietnamese consumer price index (CPI)

Vietnamese consumer price index (CPI) gauges the average change in retail prices for a fixed market basket of goods and services CPI helps the researchers and investors to measure the inflation in Vietnam.

5 Vietnamese trade balance

The data are important for foreign exchange rate in the long run Vietnam is

a net importer, meaning that Vietnam imports more goods than it exports

Changing in the trade balance maybe affects the price of the Vietnamese Dong.

6

State bank of Vietnam (SBV) interest rate decisions for Vietnamese Dong

The State Bank of Vietnam (SBV) likely set the main interest rate which is based on three important factors: consumer price index, credit growth rate and money supply So the exchange rates, therefore, the interest rate policy emphasis the foreign exchange rate.

7

Japanese consumer price index (CPI)

Japanese consumer price index (CPI) gauges the average change in retail prices for a fixed market basket of goods and services CPI helps the researchers and investors to measure the inflation in Japan.

8 Japanese trade balance

Japan plays as well as export country Therefore, the surplus of trade balance has impact in the changing of the value of the Japanese Yen.

9

Japanese industrial production (IIP)

index-Index of Industrial Production (IPP) is basically the growth in industrial production of the country It has a close relation to the growth of Gross domestic product (GDP) to assess the economic development of an economy Accordingly, IIP may affect the exchange rate of the domestic currency against foreign currencies.

10

The Bank of Japan (BOJ) interest rate decision for Japanese Yen

The Bank of Japan (BOJ) likely set the main interest rate, which is based on three important factors: consumer price index, credit growth rate and money supply So the exchange rates, therefore, the interest rate policy emphasis the foreign exchange rate.

2.1.2 Technical analysis Technical analysis is a method of analyzing and forecasting the direction of prices through the study of historical price data, primarily price and volume A basic principle of technical analysis is the market price reflects all relevant information, so their analysis looks at the history of the model of the stock exchange rather than the external controls such as economic, fundamental and news So, price action tends to repeat itself because investors generally tend to be patterns of behavior - such as technical analysis focuses on trends and conditions can be identified

Auto-regressive integrated moving average (ARIMA), which is one of tools in the technical analysis, can predict the future price from historical data (time series data sets) Auto-regressive integrated moving average model is the model for predicting tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

time series data The model uses no other independent variables but the prediction will come out from historical exchange rates Auto-regressive integrated moving average model requires large run of time series data and technical expertise on the part of forecaster

The current values of a time series in terms of past values of itself (the auto-regressive component) and past values of the error term (the moving average terms) were represented by an auto-regressive integrated moving average model The number of times a series, which were referred by the integrated component, to must be differentiated to play stationary Auto-regressive integrated moving average model are agnostic in forecasting time series

2.2 Empirical Studies Historically, there are many researches related on the foreign exchange rate that showed as follows:

Table 2.2 Empirical Studies

Dobre, I and Maria, A

(2008)

They applied the Box-Jenkins methodology to estimate unemployment rate during monthly data from 1998 to

2007 period

The evidence is presented that ARIMA (2,1,2) plays the most adequate model for the unemployment rate

Faust, J., Rogers, J.H

and Wright, J, H., (2003),

They examine the forecasting performance

of standard macro-economic models of foreign exchange rates in real time, using the main economic indicators database of the organization for economic co-operation and developments (OECD) They calculated out of sample forecasts, as they would have been made at the time, and compares them to a random walk alternative

The resulting of time series testing indicates that standard macro-economic models have large effects on exchange rate predictability

Kilian, L.(1997)

He illustrated the use of four major exchange rates by a new bootstrap method

It was for small-sample inference in long horizon regressions by analyzing the long horizon predictability In addition, the findings are reconciled with those of an earlier study

The evidence is presented that the linear VEC model framework underlying the empirical study is likely to be mis- specified, and that the methodology for constructing bootstrap p-values for long- horizon regression tests may be fundamentally awed

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After that checking the accuracy of the model in predicting performance

He have used Box-Jenkins for making the predicting model

ARIMA(0,1,1) is the most suitable model to be used for predicting the gold price

Meese, Richard A., and Rogoff, Kenneth (1982)

They issue that the study in a number of time series and structural models, which was based on out of sample predicting accuracy

As the result, they discovered that one to twelve month horizons for the USD/DEM, USD/GBP, USD/JPY and trade-weighted dollar exchange rates was estimated by a random-walk model Meyler, Aidan

and Kenny, Geoff and Quinn, Terry (1998),

Auto-regressive integrated moving average (ARIMA) time series models was applied for forecasting Irish inflation

They identified the ARIMA models - the Box Jenkins approach on forecast performance

They suggested that the approach focus

on maximizing in-sample ‘goodness of fit’ and minimizing out of sample forecast errors Thus, the approach followed is unashamedly one of ‘model mining’ with the aim of optimizing forecast performance

The harmonized index of consumer prices (HICP) and some of its major sub- components play practical issues in ARIMA time series forecasting

Nochai, R and Nochai, T., (2006),

The objective of the research is to find an appropriate ARIMA model for predicting oil palm price and wholesale price of oil palm of Thailand in the period from 2000

Zhang, Y., and

Wu, H., (2011),

Their study focuses the relationship between the AUD/JPY exchange rate and some economic fundamentals by using a regression model

The prediction result of the ARIMA model is more accurate than those based

on the fundamental regression model

Source: Author’s collection from different sources

Summarily, the study finds that a topic relating to the analysis of exchange rate volatility is not a new subject in the world Two main theoretical frameworks will be discussed in this study: (1) Fundamental analysis is based on a thorough examination

of macroeconomic variables and policies that have an impact on the currency Our study makes decision for applying some economic indicators for VND/JPY exchange rate They are the price of rice, the price of light crude oil (West Texas Intermediate oil), Vietnamese industrial production index, Vietnamese consumer price Index (CPI), Vietnamese trade balance, State bank of Vietnam (SBV) interest rate decisions for Vietnam Dong, Japanese industrial production index, Japanese consumer price tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

index (CPI), Japanese trade balance, and Bank of Japan (BOJ) interest rate decisions for Japanese Yen (2) Technical analysis is Auto-regressive integrated moving average (ARIMA) model that can predict the future price from historical data (time series data sets) Recently research, M Massarrat, M and Khan, A., (2013), has made research and analysis related to gold price prediction tools in Auto-regressive integrated moving average (ARIMA) Results suggest that ARIMA (0,1,1) is the most suitable model to be used for predicting the gold price Ying Zhang and Hailun

Wu (2011) use the auto-regressive integrated moving average (ARIMA) model and multiple regression model to analysis Australia Dollar and Japanese Yen The prediction result of the auto-regressive integrated moving average model (ARIMA) is more accurate than those based on the multiple regression model

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CHAPER THREE: RESEARCH METHODOLOGY Chapter three explains the number of observations and sources of database that applied for testing the multiple regression model and Auto-regressive integrated moving average model Our study also emphases the Box-Jenkins methodology in auto-regressive integrated moving average plays the model identification and model selection, parameter estimation and model checking, It examine the past value in time series, in order to make forecasts Moreover, the paper formulates a multiple regression model, which economic fundamentals influence the price movement of the VND/JPY exchange rate

3.1 Source of the data sets The data in this study is mainly based on the monthly from January 2007 (the 1stobservation) to December 2012, which are includes 84 observations Sources of data sets are follows:

Table 3.1: Variable sources

Variable Name of website Sources Light crude oil (West

Texas Intermediate oil)

Chicago board of trade Retrieved April 4, 2013 from

General statistics office Retrieved April 18, 2013 from

The State bank of Vietnam

Retrieved April 7, 2013 from http://www.sbv.gov.vn/

VND/JPY exchange rate Joint stock commercial

bank for foreign trade of Vietnam (Vietcombank)

Retrieved April 8, 2013 from http://www.vietcombank.com.vn/exchangera tes/

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The Japanese consumer price index (CPI), Japanese trade balance, Japanese industrial production index and interest rate decision of Japanese Yen

Bank of Japan Retrieved April 4, 2013 from

search.boj.or.jp/index_en.html

http://www.stat-Sources: Author’s collection

3.2 The multiple regression model

In our study, the paper formulates a multiple regression model, which is used to determine how much the economic fundamentals such as the price of a commodity, interest rates, and so on influence the price movement of the VND/JPY exchange rate

The model is specified as:

Xratet = α1 + α2CPIjpt + α3CPIvnt + α4IIPjpt + α5IIPvnt + α6IRjpt + α7IRvnt +

α8∆tradejpt + α9∆tradevnt + α10∆ricet + α11∆oilt + ε tThe variables are defined in the below table:

Table 3.2: List of variable

Variable Description Expected sign of the

coefficients

Theory at literature reviews

Xrate t Value of VND/JPY rate over time t

CPIjp t The consumer price index (CPI) index is

calculated as a percentage to reflect the change in relative prices of Japanese consumer goods over time t -

International Fisher Effect

CPIvn t The consumer price index (CPI) index is

calculated as a percentage to reflect the change in relative prices of Vietnam consumer goods over time t +

International Fisher Effect

IIPjp t Index-Industry Products referred to as the

IIP index is an indicator of industrial activity produced of Japan +

Purchasing Power Parity

IIPvn t Index-Industry Products referred to as the

IIP index is an indicator of industrial activity produced by the General Statistics Office of Vietnam announced by time t -

Purchasing Power Parity

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IRvn t The interest rate of Vietnam Dong at time

t - International Fisher Effect

∆tradejp t The percentage change in the Japanese

trade balance at time t + Purchasing Power Parity

∆tradevn t This is the percentage change in the

Vietnam trade balance Since there is an adverse balance of trade, we use the first difference divided by the absolute value of the lagged trade balance at time t

-

Purchasing Power Parity

∆rice t The percentage change in the Vietnam

export rice price at time t *

∆oil t The percentage change in the crude oil

price at time t *

* a considerations was unclear

3.3 Box-Jenkins’ auto-regressive integrated moving average model (ARIMA) Meyler, Aidan and Kenny, Geoff and Quinn, Terry (1998) proposed the Box-Jenkins methodology for forecasting Irish inflation The Box-Jenkins methodology plays the model identification and model selection, parameter estimation and Model checking for examining the past value in time series, in order to make forecasts It has predictability in foreign exchange rate is accepted in many researchers and countries

They illustrates as follows:

Figure 3.1: Box Jenkins methodology for ARIMA modeling

Sources: Meyler, Aidan and Kenny, Geoff and Quinn, Terry (1998)

Step 1 (Data collection and examination): Meyler, Aidan and Kenny, Geoff and Quinn, Terry (1998) recommended a lengthy time series of data (at least 50 observations) is required for univariate time series forecasting In study, the tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

VND/JPY monthly database shows 84 observations from January 2007 (the 1stobservation) to December 2012 (the 84th observation)

Step 2 (Determine stationary of time series): Gujarati (2002) defined a stationary time series is a series with constant mean, variance and auto-covariance at various lags He also introduced a rule of thumb to choice an appropriate lag length It is recommended

to compute the autocorrelation function (ACF) up to one-third to one-quarter the length of the time series

Step 3 (Model identification and estimation): As mentioned above, d is order of seasonal differences to make time series stationary The next task is to determine the value of p and q the paper use the graphical properties of the autocorrelation function (ACF) and the partial autocorrelation function (PACF) Gujarati, (2002) proposed theoretical patterns of the autocorrelation function (ACF) and the partial autocorrelation function (PACF), which are summarized in follows:

non-Table 3.3 The autocorrelation function (ACF) and the partial autocorrelation function (PACF) patterns summary

Type of Model Typical pattern of ACF Typical pattern of PACF AR(p)

Decays exponentially or damped Sine wave pattern or both Significant spikes through lags p MA(q) Significant spikes through lags q Declines exponentially

ARMA(p,q) Exponential decay Exponential decay

Source: Gujarati, D N (2002) Basic Econometrics 4th edition

Step 4 (Diagnostic checking): In this step, model must be checked for adequacy by considering the properties of the residuals whether the residuals from an ARIMA model must has the normal distribution and should be random An overall check of model adequacy is provided by the Ljung-Box Q statistic The test statistics is to examine whether residual is a “white noise” or not If it is a “white noise” then the model is accepted Otherwise, the procedure will be reset to the beginning Q-statistics and Normality test can be used in this step

Step 5 (Forecasting and forecast evaluation): Forecasts for one period or several tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

this research paper, the paper utilizes E-views 6 with “forecast” package build and evaluate ARIMA model

Meyler, Aidan and Kenny, Geoff and Quinn, Terry (1998) listed that some main benefits of using the auto-regressive integrated moving average as follows: First, they believe that it is useful if the time series have a big variables Second, they emphasize that this reduced some error that occurs with multiple repressors Third, the multiple models always require the huge and correlated variable in time series Forecasting by multiple models is highly dependent on the un-available variables and source of predicting, therefore, its result face uncertainty.

However, Meyler, Aidan and Kenny, Geoff and Quinn, Terry (1998) synthesize some limitations of auto-regressive integrated moving average (ARIMA); some of identification approaches plays as subjective Moreover, the talent and experience of the forecasters can be depended by the reliability of the chosen model (although other modeling approaches are applied by this criticism as well) It is not embedded within any underlying theoretical model or structural relationships It is not clear to the economic significance of the chosen model Furthermore, unlike with structural models, it is not possible to run policy simulations with Auto-regressive integrated moving average models

Model for non-seasonal series are called autoregressive integrated moving average model, denoted by ARIMA (p,d,q) Here p indicates the order of the autoregressive part, d indicates the amount of differencing, and q indicates the order of the moving average part If the original series is stationary, d= 0 and the auto-regressive integrated moving average models reduce to the ARIMA (p,d,q) model

Summarily, based on theories that are showed in the literature review, methodology chapter undertook to build the multiple regression model from selected variables in table 2.1 It is specified as: Xratet = α1 + α2CPIjpt + α3CPIvnt + α4IIPjpt + α5IIPvnt+ α6IRjpt + α7IRvnt + α8∆tradejpt + α9∆tradevnt + α10∆ricet + α11∆oilt + εt Moreover, our study builds the steps to test the ARIMA model by the Box-Jenkins methodology with five steps: data collection and examination, determine stationary of time series, tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

model identification and estimation, diagnostic checking, and forecasting and forecast evaluation

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CHAPTER FOUR: THE ROLE OF THE JAPANESE YEN IN THE ECONOMIC RELATIONSHIP BETWEEN VIETNAM AND JAPAN

Chapter four presents the foreign exchange policy of Vietnam and Japan and emphasizes the impact of the Japanese Yen in the trade, investment and finance between Japan and Vietnam The exporters, importers, investors and commercial banks are interested in the fluctuations in VND/JPY exchange rate Hence, it defines that the demand of analysis on the fluctuations in VND/JPY exchange rate plays an important role in defending the exchange rate risk volatility of the exchange rate

4.1 Overview of the Vietnam foreign exchange policy Managing the exchange rate keeps the macroeconomic stability It helps to control inflation It reduces the balance of payments deficit and improves the international trade balance It is more important than when Vietnam is still trying to overcome the 2007-2009 global economic crises Historically, Vietnam stopped the focusing central-planned economy in 1986 and plays towards to the foreign exchange rate policy However, the U.S Dollar is almost the default currency pegs in Vietnam The State bank of Vietnam (SBV) announced the VND/USD exchange rate Based on international exchange rates between the U.S Dollar and other foreign currencies, the bank of commerce will establish the exchange rate between those currencies to U.S

Dollar The objectives of the government’s foreign exchange policy are the control of foreign exchange market and narrow black market operations in foreign currencies

Moreover, when it is necessary, the government can intervene in the foreign exchange market In recent years, Vietnam makes great efforts to increase exports It improves the balance of payments deficit It reduces the burden of foreign debt It tries to attract foreign investment Moreover, Vietnamese government tries to improve the institutional, legal, financial system, and commercial banks

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The Vietnamese foreign exchange policy is divided in the last two stages8 (1) in the period before 1996, the State bank of Vietnam managed the almost of foreign exchange activities, including inflows and outflows The exchange rate is strong government intervention to keep rates steady (in 1991, the State bank of Vietnam had

to intervene to keep the currency price before fever U.S Dollar; in 1992, the State bank of Vietnam had to intervene to curb down against the appreciation of the USD against the dollar) (2) In the period from 1997 to present, Vietnam plays the flexible exchange rate that in fixed by the regulatory margin fluctuated between U.S Dollar and Vietnamese Dong In addition, the Vietnamese foreign policy makes towards easing the current transaction Therefore, the State bank of Vietnam allows the individual who can save the foreign currency in bank deposit without regarding to the origin of their foreign currency In addition, the savers play easy to drawn both capital and foreign currency Foreign currency credit is also extended to the borrowers

Recently, the Vietnamese foreign exchange market plays three markets (foreign exchange market inter-bank, foreign currency trading market between financial institutions and free market) (1) The foreign exchange market inter-bank is where the financial institutions dealing in foreign currency to satisfy the monetary needs of the customer, to balance its foreign status Here is where the State bank of Vietnam plays effective intervention in the exchange rate between Vietnamese Dong and U.S

Dollars However, market activity is still many defects such as loss of balance between orders to buy and sell foreign currency at some transactions, the non-common using of derivative tools The foreign exchange market inter-bank does not reflect market supply and demand of foreign currency in the economy Result creates conditions for the free markets to thrive Therefore, the market inter-banks currency often plays imbalances In case of excess foreign exchange, market participants are always tried to put the selling order (in 1994-1995) Nobody sell in the scarcity condition of foreign currency (in 1997-1998) and (in 2008-2010) The State bank of

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Vietnam regulates not as lopsided as expected in the transaction Because the exchange is not reasonably satisfied, as the market participants lose confidence in the market Consequently, they make to deal directly with each other, not through the inter-bank market (2) Foreign currency trading market between financial institutions authorized to deal in foreign currency to customers (mainly the importers and exporters) Exchange rates based on the market rate of inter-bank market plus margin that regulated by State bank of Vietnam However, it is also less flexible It does not follow the free market (3) The free market takes place between individuals together, between individuals and business Foreign exchange rate, which traded in the private stores, is very flexible Although the volume of foreign currency traded on the free market is not as large as the official market, but its rates reflect market supply and demand, putting pressure on the exchange rate of foreign currency transactions with credit institutions customers

The management of foreign exchange of the private stores and dealers play so loose

Therefore, it is the big difference between the exchange rate in the official market and the free market Some has led to the agents taking advantage of state for trade profits

Financial institutions are not purchased a significant amount through foreign currency sources This situation limits the ability to control the flow of foreign currency in domestic circulation, increasing the transactions on the black market illegally, increasing the psychological speculation of foreign currency

4.2 Overview of the Japan foreign exchange policy Japanese economy faces the seriously threat deflation9 Accordingly, since the property bubble burst in Japan in the early 1990s, the deflation has tightened to Japanese economy Deflation was caused by tightening monetary, pulling the debt burden and the collapsing of the commercial banks in the 1990s Investment and

private consumption began to decline and deflation becomes more serious10 About the foreign exchange rate policy, Japanese policy enforcement floating exchange rate

of the Japanese Yen against most other currencies Accordingly, the Japanese Yen is one of the strongest currencies in the world with 3.9% of global foreign exchange reserves in the first quarter of 2013 as follows:

Table 4.1: Global foreign exchange reserves (%)

1995 2000 2005 2010 Quarter 1/2013 U.S Dollar 59,0 70,7 66,4 61,8 62,2

Sources: International Monetary Fund, 2013

Additionally, the Japanese foreign exchange law in 1997 was enacted Japanese government reformed to monetary and financial system of Japan It allows the foreign exchange of freely transaction such as the Japanese are so cash from abroad The imported good is allowed settlement by foreign currencies As a result, the demand holds of Japanese Yen increased strong as well as safe assets when the global economic crisis11

The appreciation of the Japanese Yen makes deflation that becomes worse for the Japanese economy Therefore, the Japanese government implements a series of policies and fiscal measures to combat monetary deflation and foreign exchange intervention to devalue the currency as the following statistics:

Table 4.2: History of the Japan's interventions in the foreign exchange rate

Term Event June-98

U.S America cooperates with the Japan after raising concerns around the Japanese banking system

May-02

Japanese government must act alone devalued by pessimism about the U.S

economy

January-03

Japanese government sold the Japanese Yen when the U.S government expected

to give a strong dollar policy

March-04 Japanese government completed the program sold 35 trillion Japanese Yen September-10 Japanese Yen is intervented because of its highest level in 15 years

March-11

Japanese government sold Japanese Yen to devalue the currency after the earthquake and the tsunami on 11/03/2011 (692,5 billion Japanese Yen was sold out)

August-11

The Japanese government sold Japanese Yen about 4 trillion Japanese Yen equivalent to 50.6 billion U.S dollars

November-11

The Japanese government sold Japanese Yen about 1,020 billion yen equivalent

of about 13.3 billion U.S Dollars; Bank of Japan (BOJ) has expanded the fund to buy assets from 15 trillion Japanese Yen to 20 trillion Japanese Yen to stimulate economic growth

December-12

The Bank of Japan (BOJ) continues to keep the lowest interest rates In addition, the Bank of Japan (BOJ) decided to increase the purchasing asset program by 10 trillion yen (119 billion dollars) from 91 trillion yen to 101 trillion yen to stimulate the economy Moreover, the Bank of Japan (BOJ) to raise its inflation target at 2% instead of 1%

April-13

The Bank of Japan (BOJ) is committed to strengthening the Japanese government bonds with scale 7,500 billion Japanese Yen (equivalent to 78.6 billion U.S dollars) per month, while doubling the monetary base, including cash in circulation and deposits of financial institutions at the central bank, in the next 2 years This plan was worth to 1,400 billion dollars

Sources: Ministry of Financial of Japan and Bank of Japan, 2013

The table 4.2 showed that Japanese Yen plays most unstable value because of Japanese government’s intervention Therefore, this makes increasingly difficult, risky for exporters, importers, commercial banks and Japanese investors in the international payment process by Japanese Yen

4.3 The impact of the Japanese Yen in the trade, investment and finance between Japan and Vietnam

The Japan-Vietnam economic partnership agreements (JVEPA)12 plays meaningly on the economic relationships between Japan and Vietnam JVEPA is a bilateral agreement comprehensive cover areas such as trade in goods, trade in services, investment, improve the business environment, labor mobility, cooperation on technical standards art, etc JVEPA encourages economic cooperation, trade and

investment between Vietnam and Japan, thereby unlocking the potential effectiveness and advantages of the two countries in relation with the economy region and the world The implementation of JVEPA contributes to the relationship and multifaceted cooperation between government, business and the people of the two countries to a new stage of development, creating a solid foundation to implement the consumption towards strategic partnership for peace, and prosperity in Asia Since then, the Japanese Yen plays increasingly important role in the economic relationships Vietnam-Japan in the following expression

4.3.1 The trade of Vietnam and Japan: From 2008 to 2012, total value of trade between Vietnam and Japan continued to increase in Figure 4.1 According to statistics of Vietnam general department of customs, Japan is one of the market's largest commodity markets in Vietnam behind China and South Korea in 201213 Figure 4.1: Value of trade balance Vietnam-Japan (Billion U.S Dollar)

0 5 10 15 20 25

2008 2009 2010 2011 2012

Sources: Vietnam General Department of Customs, 2013

For Japan, Vietnam plays the 17th partners on commodity exports and 15th in imports goods from the Japan market14 Japanese government always identifies as a traditional market potential for businesses in Vietnam Export turnover between the two countries increased over the years, but still not commensurate with the potential tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

between the two countries The fluctuation on the Japanese Yen has a great influence

on the proportion of trade between the two countries Accordingly, the case of appreciation Japanese Yen in recent years has prompted the Vietnam's exports to Japan The exports of Vietnam to Japan to be cheaper that include mainly such as textiles, crude oil, vehicles and spare parts, marine products, wood and wood products and etc However, the import from Japan to Vietnam faces a disadvantage because of more expensive imports In addition, the imports from Japan to Vietnam including machinery and equipment spare parts, iron and steel, plastic materials, computers, electronic products, components etc Therefore, exporters and importers in Vietnam face many risks in the international trade with Japan because of the unstable of Japanese Yen and Vietnam Dong rate Because monetary policy Vietnam plays on the U.S Dollar exchange rate peg and the floating exchange rate with the Japanese Yen

The other reason is the foreign exchange market intervention surprise by Japanese government that increase or decline in the Japanese Yen against the U.S Dollar Since then, the analysis and prediction in fluctuation of the Japanese Yen plays an important role for the exporters and importers The purpose is defense of exchange rate risk, and use financial tools to regenerate hedging

4.3.2 Direct investment from Japan to Vietnam: The fluctuation of the Japanese Yen reduction is a problem for Japanese companies expanding overseas investment or domestic investment in the Japanese economy When the Japanese Yen rose sharply, the investment in other countries becomes more advantageous According to the foreign investment agency under the Ministry of Planning and Investment, Japan is the largest direct investment in Vietnam From 1988 to 2012, the total registered capital reached 28.31billion U.S Dollars, accounting for 12% of total foreign direct investment (FDI) into Vietnam, the highest in the countries15 Therefore, the fluctuation of the Japanese Yen plays so important for Japanese investors who make decision for domestic or overseas investment

4.3.3 Indirect investment from Japan to Vietnam: In addition, Japan is also indirect investors in Vietnam through a major capital contribution to the joint stock companies listed on the stock market The Japanese investors interested in the purchase of shares

or investments in commercial banks Therefore, Japanese investors are monitoring the movements of the Japanese Yen to calculate the performance of investment At the same time, they play the advantage of Japan's low interest rates to invest in the region

In 2012, Vietnam has had merger and acquisition services hit by Japanese investors such as Sumitomo Life has officially acquired 18%16 stock-share of Bao Viet Insurance Company, approximately 28.3 billion Japanese Yen or VietinBank also announced the sale of 20%17 stock-share to Bank of Tokyo-Mitsubishi (UFJ) worth about 64 billion Japanese Yen, equivalent to nearly 15,465 billion Vietnamese Dong

4.3.4 The aid capital of Japan for Vietnam: According to the Department of Foreign Affairs under the Ministry of Economic Planning and Investment, Japan is a largest capital investment of official development assistance18 Many projects, which use these official development assistance funds, have contributed to the improvement of infrastructure of Vietnam Almost project will be used by the yen currency exchange rates have a significant impact on the value of Japan's official development assistance

to Vietnam 4.3.5 Benefits of Vietnam's tourism Japanese people: In addition, the number of international visitors from Japan to Vietnam plays the top three leading countries (in 2012: 576,400 Japanese visitors19, ranks 3rd in countries; rise 19.7%) This is the Japanese Yen foreign exchange reserve for Vietnam

Hence, the exchange rate policy in Vietnam and Japan has many different points

Vietnam adopted a policy of fixed exchange rates between the U.S Dollar and

Vietnamese Dong, and keeps floating alongside most of other exchange rates as Japanese Yen Meanwhile, the Japanese exchange rate policy plays the floating exchange rates with almost currencies However, the Bank of Japan and the Japanese government repeatedly play to foreign exchange intervention to devalue the Japanese Yen Therefore, Japanese Yen fluctuate abnormally Meanwhile, the Japanese Yen's role is extremely important in the Vietnam-Japan trade, the Japanese direct and indirect investment in Vietnam, in the aid capital of Japan for Vietnam This suggests that the major risks affect the exporters, importers, investors and commercial banks have paid in Japanese Yen Since then, it put forward the need for using of econometric tool to predict Japanese Yen exchange rate for controlling risk.

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CHAPTER FIVE: FOREIGN EXCHANGE RATE BETWEEN VIETNAM DONG AND JAPANESE YEN: DESCRIPTIVE DATA ANALYSIS, MULTIPLE REGRESSION ANALYSIS AND ARIMA MODEL

This chapter plays utmost important role in either researches or thesis, particular in our study Having presented the evidence and various factual points in literature review and result, the paper would presents the descriptive statistics of sample data, explaining the results’ multiple regression model of determinant model and Auto-regressive integrated moving average (ARIMA) model Moreover, our study makes comparing the forecasting performance by both models to propose which one is the best model in forecasting the VND/JPY exchange rate

5.1 Descriptive statistics

To understand the data sample, it is valuable step to investigate the sample descriptive statistics Table 5.1 below shows the description of the variables

Table 5.1: Description of the variables

Variables Mean Max Min Std Dev CPIjp t 100.51 103.10 99.20 0.8917 CPIvn t 100.93 103.91 99.24 0.9551 IPIjp t 96.45 117.30 66.90 10.8466 IPIvn t 100.73 130.39 56.65 11.8998 IRjp t 0.21 0.50 0.00 0.1787 IRvn t 8.71 14.00 7.00 1.4883

∆oil t 0.0094 0.31 -0.34 0.0977

∆rice t 0.01 0.51 -0,17 0.0886

∆tradejp t -0.11 4.30 -9.36 1.3666

∆tradevn t -1.09 5.37 -30.50 5.0034 Xrate t 194.77 273.21 131.44 50.4540

Sources: Author’s calculation using time series data (2006M1 – 2012M12) from Table 3.1

During 2006M1-2012M12 periods, the VND/JPY exchange rate fluctuated with mean value (194.77) Vietnamese Dong per one Japanese Yen, max (273.21), and min (131.44) The percentage change per month in world oil price is not much with tot nghiep down load thyj uyi pl aluan van full moi nhat z z vbhtj mk gmail.com Luan van retey thac si cdeg jg hg

period but moving up and down on monthly basic The industrial index in Japan and Vietnam show the measurement of the output produced products of economy It is not only a clear indicator of short-term in health industry, but also is the sector accounts for a large share of gross domestic product (GDP) The increasing trend of industrial index has a positive impact on the country's currency by the expansion in production output Actually, Vietnamese mean (100.72) and max level (130.40) play better than Japanese (96.44) and (117.30) Absolutely, Vietnam is the developing country The currency interest rate of Japan and Vietnam shows that biggest different way The mean value of interest rate of Japanese bank is quite low (0.21%) while that number

in Vietnam is quite high (8.71%) Actually, Japan faces to the deflation threat;

therefore, Japanese government put the low interest rate that encourages the credit and investment The trade balance of Japan-Vietnam shows as biggest different way with Japan’s mean (almost positive), and Vietnam's (almost negative) Hence, Japan play

as well as the export country, Vietnamese trade balance plays deficit in the international trade

Table 5.2: Correlation test and Anova F-test

∆oil t negative(-) -0,029716 0.0458 No

∆rice t negative(-) -0,090136 0.5159 No

∆tradejp t negative(-) -0,179382 positive(+) 0.4662 No

∆tradevn t negative(-) -0,175320 negative(-) 0.2164 No

Sources: Author’s calculation using time series data (2006M1 – 2012M12) from Table 3.1

20 See Table 2.3

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