Short-term and long-term expectations of the yen/dollar exchange rate: Evidence from survey data

Abstract

Three surveys of exchange rate expectations allow us to measure directly the expected rates of return on the yen versus the dollar. Expectations of yen appreciation against the dollar have been (1) consistently large, (2) variable, and (3) greater than the forward premium, implying that investors were willing to accept a lower expected return on dollar assets. At short-term horizons expectations exhibit bandwagon effects, while at longer-term horizons they show the reverse. A l0% yen appreciation generates the expectation of a further appreciation of 2.4% over the following week, for example, but a depreciation of 3.4% over the following year. At any horizon, investors would do better to reduce the absolute magnitude of expected depreciation. The true spot rate process behaves more like a random walk. J. Japan. Int. Econ., September 1987, 1(3), pp. 249–274. Department of Economics, University of California, Berkeley, CA 94720; and Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA 02139.