Regime switches in exchange rate volatility and uncovered interest parity

We use a regime-switching model to examine how exchange rate volatility is related to the failure of uncovered interest parity. Main findings are as follows. First, exchange rate returns are strongly influenced by regime switches in the relationship between the returns and interest rate differentials. Second, low-yielding currencies appreciate less frequently, but once it occurs, their movements are faster than when they depreciate. Third, depreciation of low-yielding currencies and low volatility are mutually dependent on each other. Finally, these three findings are more evident for shorter horizons. The second and third results are consistent with a market participants’ view: short-term carry trades in a low-volatility environment and their rapid unwinding substantially influence exchange rates. We consider the effects of funding liquidity to explain these results.     

Real-time analysis on Japan’s labor productivity

This paper analyzes the revision to Japan’s labor productivity, measured using Japan’s System of National Accounts (SNA) data. We draw three main findings from our analysis. First, SNA data has been substantially revised in and after the second comprehensive revisions, as well as at the earlier stage of revisions. We find that the past absolute revisions to the annual growth rate of labor productivity often went beyond 1% point. Second, the annual growth rate of labor productivity has been revised upward by 0.4% points on average. We show that part of its upward revisions reflects an underestimation of employment through an increase in ‘non-response people,’ people who do not respond in the Population Census. Third, revisions to source data such as the Population Census and the Employment Status Survey are helpful to predict revisions to labor productivity growth. Our regression results suggest that labor productivity is likely to be revised upward during expansions or with low real-time estimates of value added. We conclude that the three findings indicate that labor productivity during the 2000s will experience substantial revisions in the future. This conclusion takes into account the fact that the SNA after 2000 has experienced at most one comprehensive revision. The upcoming revisions to labor productivity can be positive rather than negative.