Meaning: The quote by Toshihiko Fukui, a former Governor of the Bank of Japan, touches on the topic of intra-firm trading and its impact on the response of economic activity to exchange rate movements. In essence, the quote suggests that the rise in intra-firm trading has facilitated the smooth shifting of business activities across borders, thereby enhancing the ability of economic activity to adapt to exchange rate fluctuations in the long term.

Intra-firm trading refers to the exchange of goods, services, or capital between different branches or subsidiaries of the same company, often operating in different countries. This type of trading has become increasingly prevalent in the context of globalization, as multinational corporations seek to optimize their production processes, take advantage of cost differentials, and access diverse markets. As a result, intra-firm trading has become a significant component of international trade and has implications for the functioning of global financial markets and the response of economic activity to exchange rate movements.

One of the key implications of the rise in intra-firm trading is its impact on the adaptability of businesses to exchange rate fluctuations. Traditionally, exchange rate movements have been seen as influencing the competitiveness of exports and imports, as well as affecting the profitability of multinational firms operating in different currency zones. However, the increased prevalence of intra-firm trading has altered the dynamics of this relationship. By enabling businesses to reallocate their activities across borders more seamlessly, intra-firm trading has effectively enhanced the ability of firms to respond to exchange rate movements in a more agile and efficient manner.

This phenomenon has important implications for the long-term dynamics of economic activity. In the past, exchange rate movements often led to significant adjustments in trade patterns and the competitiveness of firms, which could have disruptive effects on economic activity. However, the ability of businesses to engage in intra-firm trading means that they can mitigate some of the negative impacts of exchange rate volatility by adjusting their production and sourcing strategies within the organizational framework. This ultimately strengthens the overall response of economic activity to exchange rate movements, allowing for a more resilient and adaptive economic system in the long run.

Furthermore, the increase in intra-firm trading has broader implications for the functioning of global supply chains and the dispersion of production activities. As multinational corporations engage in intra-firm trade to optimize their global operations, they create interdependencies between different parts of their organizational structure, often spanning multiple countries. This interconnectedness can lead to a more integrated and efficient allocation of resources, as well as a more diversified and resilient production network. In turn, this can contribute to the overall stability and flexibility of the global economic system, enhancing its capacity to withstand and adapt to external shocks, including those related to exchange rate movements.

In conclusion, Toshihiko Fukui's quote highlights the transformative impact of the recent increase in intra-firm trading on the response of economic activity to exchange rate movements. The ability of businesses to shift their activities across borders smoothly has profound implications for the long-term dynamics of economic activity, leading to a more adaptive and resilient economic system. As intra-firm trading continues to shape the landscape of international trade and business operations, its influence on exchange rate dynamics and economic responses is likely to remain a significant topic of interest and study in the field of economics and global business.