Sectoral Price Movements under the Yen Appreciation

This paper analyzes the movements of tradable goods prices in Japan. The import price indices and the export price indices are matched with the domestic wholesale price indices at the most detailed level available for Japan, and the pricing behavior in the yen appreciation period (1985–1995) is examined. In the import-side analysis, we investigate how far the price movements under currency appreciation deviate from the law of one price. We find that internal–external price differentials have surprisingly expanded for most of the products since 1985. For a number of commodities, the import prices do not decline as far as the exchange rate appreciates, and the domestic wholesale prices do not decrease as far as the import prices decline. Although the expanded price gaps cannot necessarily be interpreted as a result of deliberate trade barriers, they suggest that some sort of handicap is imposed on imported goods and the large fraction of rent generated by the yen appreciation is intercepted in the middle. In the export-side analysis, the relationship between the globalization of firms' activities and export pass-through is investigated. Our cross-sectional regression analysis indicates that the export path-through rates tend to be low when the value added ratios of foreign production of Japanese firms are high. Low export pass-through under currency appreciation is often interpreted as a result of firms' attempts to keep their foreign market share, but the globalization of firms' activities may be another important factor in lowering the pass-through.J. Japan Int. Econ.,December 1997,11(4), pp. 611–641. Department of Economics, Keio University, 2-15-45 Mita, Minato-ku, Tokyo 108, Japan.     

Japan's inflation under the Bretton Woods system: How large was the Balassa–Samuelson effect?

Japan's real exchange rate appreciation during the post-WWII manufacturing-led growth period has been regarded as a classical example of the Balassa–Samuelson effect. We choose the most conspicuous sub-period—1956–1970—to confirm the effect. Japan was in a rapid growth period under the U.S. dollar peg (real GDP growth, 9.7% per annum). The nominal anchor was weak as Japan's inflation rate (GDP deflator-based, 5.4%) was markedly higher than the U.S. rate (2.6%) during the 15-year period. The decomposition of the annual 2.7% (geometric) Japan–U.S. inflation rate gap (real exchange rate appreciation of the Japanese yen) reveals that the Balassa–Samuelson effect accounted for 0.7%; most of the real exchange rate appreciation (1.7%) was attributed to greater price increases in Japan's tradables. Although Japan's tradable sector achieved high TFP growth, the joint effect of the tradable–nontradable TFP growth difference between the two economies was too small to generate a sizable Balassa–Samuelson effect. Japan's example may suggest that even in rapidly growing economies, the magnitude of the effect in long-run real exchange rate appreciation is generally modest.     

Effects of Japanese macroeconomic statistic announcements on the dollar/yen exchange rate: High-resolution picture

Using high-frequency transaction data of the actual trading platform, we examine market impact of Japanese macroeconomic statistics news within minutes of their announcements on the dollar/yen exchange rate. Macroeconomic statistics surprises that consistently have significant effect on dollar/yen returns include Tankan (business condition survey conducted by Bank of Japan), GDP, industrial production, price indices and balance of payment. The announcement itself, in addition to the magnitude of the surprise, is found to increase the number of deals and price volatility immediately after the announcement. Most effects, when significant, take place within 30 min of statistics announcements.     

THE YEN‐DOLLAR EXCHANGE RATE AND MALAYSIAN MACROECONOMIC DYNAMICS

This paper empirically assesses the effect of the yen‐dollar exchange rate on selected macroeconomic variables, namely, real output, price level, and money supply, for Malaysia. The results, which are based on a vector autoregressive framework, suggest that variations in the yen‐dollar rate can have significant influences on Malaysia's macroeconomic variables. More specifically, the yen‐dollar depreciation leads to contraction in real GDP and money supply. These results are fairly robust to alternative model specifications. We believe that, apart from providing important insights into the interactions between the yen‐dollar rate and domestic macroeconomic variables, our results contribute to the debate on choice of exchange rate regimes for Malaysia.     

Was it really a dollar peg?: The exchange rate policies of East Asian countries, 1980–1997

This paper examines the exchange rate policies of East Asian countries during the period preceding the currency crisis of 1997, in an attempt to ascertain the extent to which they could be considered, as they frequently are, as a dollar peg. We do so by estimating the implicit weights of foreign currencies in the nominal exchange rate determination of East Asian currencies by means of a time-varying parameter model. The crucial element of our approach concerns how the weight of the Japanese yen was altered in response to the movement of the yen–dollar exchange rate. It is found that, while the weight of the U.S. dollar was large and the weight of the Japanese yen was small for the period as a whole, the weight of the yen was raised in some of the countries in the early 1990s. In particular, the Korean and Malaysian authorities raised the weight of the yen when the yen depreciated against the U.S. dollar, while the Singaporean authorities raised the weight of the yen when the yen appreciated against the dollar.     

Purchasing power parity: Granger causality tests for the yen–dollar exchange rate

The paper analyses the causality between the Japanese prices and the yen–dollar exchange rate. It explains the long-term appreciation trend of the Japanese yen and why the Japanese yen proved strong even during the economic slump of the 1990s. The paper suggests that the appreciation of the Japanese yen forced the Japanese enterprises into price reductions and productivity increases, which put a floor under the high level of the yen and, thus, initiated rounds of appreciation. This corresponds to the conjecture of a vicious (virtuous) circle of appreciation and price adaptation. Further, there is evidence that the yen-appreciation has been accommodated by the Bank of Japan’s monetary policy. This corresponds to the conjecture that the recent Japanese deflation is imposed from outside via the exchange rate.     

How Did the Dollar Peg Fail in Asia?

In this paper, we have constructed a theoretical model in which the Asian firm maximizes its profit, competing with the Japanese and the U.S. firms in their markets. The duopoly model is used to determine export prices and volumes in response to the exchange rate fluctuations vis-à-vis the Japanese yen and the U.S. dollar. Then, the optimal basket weight that would minimize the fluctuation of the growth rate of trade balance was derived. These are the novel features of our model. The export price equation and export volume equation are estimated for several Asian countries for the sample period from 1981 to 1996. Results are generally reasonable. The optimal currency weights for the yen and the U.S. dollar are derived and compared with actual weights that had been adopted before the currency crisis of 1997. For all countries in the sample, it is shown that the optimal weight of the yen is significantly higher than the actual weight.J. Japan. Int. Econ.,Dec. 1998,12(4), pp. 256–304. Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo 186, Japan; Department of Commerce, Hitotsubashi University, Kunitachi, Tokyo 186, Japan; Department of Commerce, Takachiho University, Suginami, Tokyo 168, Japan.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, F33, O11.     

Dutch Disease Scare in Kazakhstan: Is it real?

In this paper we explore the evidence that would establish that Dutch disease is at work in, or poses a threat to, the Kazakh economy. Assessing the mechanism by which fluctuations in the price of oil can damage non-oil manufacturing—and thus long-term growth prospects in an economy that relies heavily on oil production—we find that non-oil manufacturing has so far been spared the perverse effects of oil price increases from 1996 to 2005. The real exchange rate in the open sector has appreciated over the last couple of years, largely due to the appreciation of the nominal exchange rate. We analyze to what extent this appreciation is linked to movements in oil prices and oil revenues. Econometric evidence from the monetary model of the exchange rate and a variety of real exchange rate models show that the rise in the price of oil and in oil revenues might be linked to an appreciation of the U.S. dollar exchange rate of the oil and non-oil sectors. But appreciation is mainly limited to the real effective exchange rate for oil sector and is statistically insignificant for non-oil manufacturing.

A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility

We study the impact of Japanese foreign exchange intervention on the volatility of the yen/dollar exchange rate since the early 1990’s in a GARCH framework with interventions as exogenous variables. Using daily intervention data provided by the Japanese Ministry of Finance, we show that the effect of interventions varies over time. From 1991 up to the late 1990’s, Japanese foreign exchange intervention is associated with an increase in volatility of the yen/dollar exchange rate. After the year 1997, Japanese foreign exchange intervention correlates with reductions in exchange rate volatility. This can be explained by the fact that Japanese foreign exchange intervention remained quasi unsterilized in the liquidity trap.

Optimal Pegs for East Asian Currencies

It has been evidenced that the U.S. dollar is prominent in the exchange rate regimes of Asian countries. This paper shows that the relative stability of Asian exchange rates against the U.S. dollar until the 1997 crisis is not accounted for by the theory of optimum currency areas, in contradiction to the situation in Europe vis-à-vis the deutsche mark. An alternative framework is proposed where the absence of a yen bloc is explained by the mismatch between the country distribution of trade and the currency distribution of the debt. It is shown that the lack of cooperation makes Asian countries underweight the yen in their implicit basket pegs.J. Japan. Int. Econ., March 1999,13(1), pp. 44–60. University of Lille 2 (CADRE) and CEPII, 9 rue G. Pitard, 75015 Paris, France.Copyright 1999 Academic Press.Journal of Economic LiteratureClassification Numbers: F31, F33, F36.     

A role model for China? Exchange rate flexibility and monetary policy in Japan

A substantial number of papers have proposed to allow for more exchange rate flexibility of the Chinese yuan. But few papers have tried to project how Chinese monetary policy will behave under flexible exchange rates. As Japan provides an important role model for China, this paper studies the role of the yen/dollar exchange rate for Japanese monetary policy after the shift of Japan from a fixed to a floating exchange rate regime. In contrast to prior studies, we allow for regime shifts in the impact of the exchange rate on monetary policy. The results show that the exchange rate had a substantial impact on Japanese monetary policy in periods of appreciation. This implies that repeated attempts to soften the appreciation pressure by interest rate cuts have led Japan into the liquidity trap. The economic policy conclusion for China is to keep the exchange rate pegged (to the dollar).     

An equilibrium foundation of the Soros chart

The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is near random-walk behavior sharing a common stochastic trend with the two-country monetary base differential augmented with excess reserves. In this paper, we develop a simple two-country incomplete-market model equipped with domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate. The model identifies the two-country differential in money demand shocks as the main generator of the sharp depreciation of the Japanese yen against the U.S. dollar under the Abenomics. We discuss data evidence that the identified money demand shocks are tightly correlated with longer-term interest rate differentials between the two countries.     

Asian Currency Crisis and the Generalized PPP: Evidence from the Far East

The present paper investigates the effects of the Asian currency crisis of 1997–1998 on the generalized PPP between several real exchange rates of the Far East countries. Monthly log of real exchange rates of the currencies of Thailand, Malaysia, Indonesia, the Philippines and South Korea vis-à-vis the US dollar and the Japanese yen during 1990–2004 are applied in the investigation. Further tests are conducted between exchange rates vis-à-vis the Thai baht. Tests are conducted for periods before and after the crisis. Results from the Johansen method of multivariate cointegration show a substantial change in the relationship between these real exchange rates before and after the Asian currency crisis. This result is found using rates based on three currencies: US dollar, yen and baht.     

Testing PPP for the South African Rand/US Dollar Real Exchange Rate at Different Data Frequencies

This paper tests the PPP hypothesis for the South African rand/US dollar real exchange rate using a fractional integration framework. The results suggest that the real exchange rate of the South African rand with respect to the US dollar is a highly dependent variable with an order of integration very close to 1. This finding is not affected by the data frequency considered (daily, weekly or monthly). Also, there appears to be a single break in December 2001 (possibly corresponding to a change in the monetary policy framework), with the unit root null being rejected in favour of d > 1 for the periods before the break, but not afterwards. Thus, our results strongly reject the PPP hypothesis for the South African rand/US dollar rate across data frequencies, since shocks are found to affect the exchange rate forever.     

The Louvre Accord and central bank intervention: was there a target zone?

This paper presents an empirical analysis of central bank intervention during the 10-month period following the Louvre Accord. We first examine whether the Bank of Japan and the Federal Reserve adopted a target zone in order to stabilize the yen–dollar exchange rate, by using daily foreign exchange intervention data. We then estimate the expected future exchange rate and the expected rate of devaluation in order to verify if there was a credible target zone. On the basis of these two tests, we conclude that the central banks did adopt a target zone during the period following the Louvre Accord, but that the target zone for the yen–dollar exchange rate was not credible.     

人民币升值对我国资产价格波动的影响

随着我国经济持续增长和外汇储备的逐年增加,人民币升值步伐有越来越快的趋势。自2005年7月,我国宣布结束维持十年之久的人民币汇率盯住美元政策以来,人民币已累计升值30%。人民币升值导致了我国资产价格的波动,特别是我国股票和房地产价格的起伏波动。如何应对由人民币升值引起的国内流动性过剩导致资产价格波动,成为政府面临的新挑战。     

The Yen,the US dollar,and the trade weighted basket of currencies: Does the choice of anchor currencies matter in identifying incidences of speculative attacks?

Early constructions of a single crisis index known as the exchange market pressure (EMP) index have largely been based on the fluctuations of the real or nominal exchange rate of a currency against the US dollar—the most commonly accepted anchor currency in the global market. Hardly any studies have however tested the sensitivity of this crisis index to the choice of different “anchor” currencies. To address this pertinent issue, our study considers the EMP indices of the Indonesian rupiah, Malaysian ringgit and Thailand baht constructed by adopting three different exchange rates—the real effective rate, the local currency against the US dollar, and the local currency against the Japanese yen for the period of 1985–2003. The test results indicate that the reported incidences of speculative attacks are highly sensitive to the choice of anchor currencies.     

TRADE PATTERNS AND EXCHANGE RATE REGIMES: TESTING THE ASIAN CURRENCY BASKET USING AN INTERNATIONAL INPUT‐OUTPUT SYSTEM

This paper aims at analyzing exchange rates and trade patterns of Indonesia, Malaysia, the Philippines, Thailand, China, Korea, Singapore, and Taiwan in relation to Japan and the United States, with reference to the Asian currency crises in 1997. In order to analyze these issues, we constructed an international input‐output model linked with macroeconometric models of the ten countries/regions. Analyses on the Asian exchange rates with a currency basket peg framework show that the Asian exchange rate policy was the de‐facto dollar peg policy. As for trade patterns in relation to the yen‐dollar rate; when a country/region's industrial structure is similar to that of Japan's and the yen is weak, the appropriate change of the yen's weight proves to hold its competitiveness. By contrast, the weak yen shows a decrease of its imports, regarding complementary structure. In either case, however, effects are limited.     

The Dollar Exposure of Japanese Companies

The bulk of Japanese exports and imports are denominated in U.S. dollars rather than Japan's local currency, the yen. The consequences of dollar invoicing depend importantly on the extent to which Japanese companies hedge their dollar exposures. If they fully hedge their dollar exposures, then the choice of invoicing currency will not influence the yen profits of Japanese companies. This paper examines the degree to which Japanese companies hedge by estimating their exposure to movements in the dollar. Using Japanese stock market data and an international version of the CAPM model I estimate the extent to which Japanese company returns are correlated with changes in the yen–dollar exchange rate. The results suggest many Japanese companies are indeed exposed to yen–dollar movements and that dollar appreciations generally are positively correlated with firm returns. Since over the period 1984 to 1995, the dollar depreciated by 36% relative to the yen, it follows that the values of Japanese companies fell as a consequence of their dollar exposure.J. Japan. Int. Econ.Dec. 1998,12(4), pp. 388–405. University of Michigan, Ann Arbor, Michigan 48109-1220.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F31, G12, F23.     

Real effective exchange rates and purchasing-power-parity convergence: Empirical evidence for Denmark, 1875–2002

Abstract

Official nominal and real effective krone-rate indices compiled by the Danmarks Nationalbank are available only for the most recent decades. This article makes an attempt to overcome this data shortage by constructing long historical time-series indices of nominal and real effective krone rates for the period 1875–2002. Furthermore, the article presents a first exploratory examination of the empirical evidence regarding long-run relative purchasing-power-parity (PPP) convergence based on univariate unit-root testing of the two new long time-series indices for the real effective krone rate, with respectively consumer prices and wholesale prices as deflators. The fastest mean reversion towards relative PPP seems to have occurred in those periods where Denmark has pursued a fixed-exchange-rate policy vis-à-vis the majority of its trading partners and thus in those periods with the lowest volatility in the nominal effective krone rate.