News and the Dollar/Yen Exchange Rate, 1931–1933: The End of the Gold Standard, Imperialism, and the Great Depression

Abstract

According to the efficient market hypothesis, news in Tokyo is responsible for the exchange rate changes during the Tokyo market hours, while the U.S. news is responsible for changes in the New York hours. The intradaily dynamics of the dollar/yen exchange rate from December 1931 to November 1933 is analyzed. Japan′s decision to go off gold in December 1931 caused depreciation of the yen by 30% in a month, mostly in the Tokyo market. During 1932, the yen depreciated another 30%, mainly due to Japan′s aggression in China and resulting diplomatic isolation. In 1933, the yen appreciated against the dollar, mainly in the New York market, due to the U.S. decision to go off gold. However, exchange rate volatility and its sensitivity to news declined over the two-year period, because of increasing capital controls. Changes in the interest rate differential were found insignificant with regard to the changes in the exchange rate. Political regime changes, such as a decision to go off gold, most influenced the exchange rate for the period considered. There were no policy decisions by Japan to cause yen depreciation to promote export and limit import in 1931–1933. J. Japan. Int. Econ., June 1993. 7(2), pp. 107–131. Institute of Economic Research, Hitotsubashi University, Kunitachi, Tokyo, Japan; and Bank of Japan, Tokyo, Japan.