Yen-dollar Exchange Rate Research Articles

The effectiveness of foreign exchange interventions in Japan

This study informs the academic and policy debate on the policy effectiveness of exchange rate interventions on exchange rate levels and volatility. Using a constructed data set comprising daily data on exchange rates, monetary policy fundamentals, exchange rate intervention dates and magnitudes of those interventions as well as financial news speculation of such interventions, we empirically estimate the policy effectiveness of Bank of Japan interventions in the exchange rate over the 12-year period between 2010 and 2022. This allows us to investigate the policy effectiveness of a variety of exchange rate interventions, or news of exchange rate interventions, across different time-horizons. We find that policy interventions in the yen exchange rate are more effective over short-horizons than long-horizons, more effective when the policy objective is a competitive devaluation of the yen rather than a revaluation, and more effective at influencing the level of the yen against major world currencies other than the US dollar. In fact, for the yen-dollar rate, we find that policy interventions may have the unintended consequences of weakening the yen (when the policy intention is to strengthen it) and increasing volatility in the yen-dollar exchange rate.

Tail risk and return predictability for the Japanese equity market

This paper studies the predictability of the Japanese equity market, focusing on the forecasting power of nonparametric volatility and tail risk measures obtained from options data on the S&P 500 and Nikkei 225 market indices. The Japanese market is notoriously difficult to forecast using standard predictive indicators. We confirm that country-specific regressions for Japan – contrary to existing evidence for other national equity indices – produce insignificant predictability patterns. However, we also find that the U.S. option-implied tail risk measure provides significant forecast power both for the dollar–yen exchange rate and the Japanese excess returns, especially when measured in U.S. dollars. Thus, the dollar-denominated Japanese returns are, in fact, predictable through the identical mechanism as for other equity market indices, suggesting a high degree of global integration for the Japanese financial market.

QUANTITATIVE EASING POLICY, EXCHANGE RATES AND BUSINESS ACTIVITY BY INDUSTRY IN JAPAN FROM 2001 TO 2006

This study empirically investigates the dynamic effects of Japan’s quantitative easing (QE) policy on industry-specific business activity using a time-varying parameter model and monthly data spanning 2001–2006. This model yields more reliable and precise results than earlier fixed effects models using quarterly data. The first major finding is that the effect of QE on yen–dollar exchange rates varied during the sampled period and is most evident in the final phases, whereas its effect on stock prices persisted almost continuously. Second, QE’s effect on Japan’s real economy — i.e., on industrial production — varies by industry and over time. Most notably, QE raised production via yen–dollar depreciation in the machinery sector (e.g., general and transport machinery) and the sector including chemicals, non-ferrous metals and iron and steel during its latter phases. This study is the first to investigate how unconventional monetary policy influences Japan’s real economy by analyzing the real exchange rate during the second half of QE implementation in Japan.

Longer Data, Less “CHEER”—Case Study of Yen-Dollar Exchange Rate

This paper compares CHEER approach in both short-run (since 1973) and long-run (since 1870) with the yen-dollar exchange rate. The most important result is that CHEER is valid only in the period when the international capital market is developed enough. Historical data will render the interest rate parity insignificant and thus CHEER will fail. Also, the paper demonstrates that when either PPP or UIP fails, modification of the cointegration variables improves the power of the CHEER test.

Knowledge Acquisition from Rough Sets Using Merged Decision Rules

Rough set theory was proposed by Z. Pawlak in 1982. This theory can mine knowledge based on a decision rule from a database, a web base, a set, and so on. The decision rule is used for data analysis as well as calculating an unknown object. We analyzed time-series data using rough sets. Economic time-series data was predicted using decision rules. However, there are cases where an excessive number of decision rules exist, from which, it is difficult to acquire knowledge. In this paper, we propose a method to reduce the number of decision rules by merging them. Similar to how it is difficult to acquire knowledge from multiple rules, it is also difficult to acquire knowledge from rules with a large number of condition attributes. We propose a method to reduce the number of condition attributes and thereby reduce the number of rules. We analyze time-series data using this proposed method and acquire knowledge for prediction using decision rules. We use TOPIX and the yen–dollar exchange rate as knowledge-acquisition data. We propose a method to facilitate knowledge acquisition by merging rules.

Empirical Evidence for Collective Motion of Prices with Macroeconomic Indicators in Japan

We apply a complex Hilbert principal component analysis (CHPCA) to a set of Japanese economic data collected over the last 32 years, comprising individual price indices of middle classification level (imported goods, producer goods, consumption goods and services), Indices of Business Conditions (leading, coincident, lagging), Yen-Dollar Exchange Rate, Monetary Stock, and Monetary Base. The CHPCA gives a new insight into dynamical linkage of price movements with business cycles and financial conditions. A statistical test identifies two significant eigenmodes with the largest and second largest eigenvalues. The lead-lag relations among domestic prices in the two modes are quite similar, indicating the individual prices behave in a collective way. However, the collective motion of prices is driven differently, that is, by the exchange rate at the upper stream side in the first mode and domestic demand at the lower stream side in the second mode. In contrast, the monetary variables play no important role in the two modes.

Volatility of main metals forecasted by a hybrid ANN-GARCH model with regressors

A hybrid model is analyzed to predict the price volatility of gold, silver and copperThe hybrid model used is a ANN-GARCH model with regressors.APGARCH with exogenous variables is used as benchmark.The benchmark is better than the classical GARCH used in previous studies.The incorporation of ANN into the best Garch with regressors increases the accuracy. In this article, we analyze volatility forecasts associated with the price of gold, silver, and copper, three of the most important metals in the world market. First, a group of GARCH models are used to forecast volatility, including explanatory variables like the US Dollar-Euro and US Dollar-Yen exchange rates, the oil price, and the Chinese, Indian, British, and American stock market indexes. Subsequently, these model predictions are used as inputs for a neural network in order to analyze the increase in hybrid predictive power. The results obtained show that for these three metals, using the hybrid neural network model increases the forecasting power of out-of-sample volatility. In order to optimize the results, we conducted a series of sensitizations of the artificial neural network architecture and analyses for different cases, finding that the best models to forecast the price return volatility of these main metals are the ANN-GARCH model with regressors. Due to the heteroscedasticity in the financial series, the loss function used is Heteroskedasticity-adjusted Mean Squared Error (HMSE), and to test the superiority of the models, the Model Confidence Set is used.

Effect of net foreign assets on persistency of time-varying risk premium: Evidence from the Dollar-Yen exchange rate

In this paper, I focus on the time-varying and persistent exchange rate risk premiums in uncovered interest rate parity associated with changes in net foreign assets. The results of my analyses of the Dollar-Yen exchange rate provide evidence consistent with my risk premium formulation and the predictability of current account balances. I contend that the strong persistent effect causes nominal exchange rates to appear non-stationary in level. I also argue that the present value model of the level of exchange rates combined with the AR(1) approximation for interest rate differentials can reconcile a failure of uncovered interest rate parity.

Does Deregulation Affect the Currency Markets? Evidence From the Yen-Dollar Exchange Rate in Three Markets

This paper examines how currency market deregulation affects the behaviors of the yen-dollar exchange rates in Tokyo, London, and New York. Using the intraday return (open to close) data, we find strong and consistent evidence that the three currency markets interact significantly, both before and after deregulation. For each of nine contracts, Tokyo positively affects London and New York, London positively affects New York and Tokyo, and New York positively affects Tokyo and London. In particular, the causality relationship is much stronger when one market trades right after another. When comparing basic statistics between the pre- and post-deregulation periods, we find that, after deregulation, the volatility of the yen-dollar exchange rate intraday returns increases, the range of the intraday returns broadens, the distribution of these returns becomes more left-skewed, and the distribution of the intraday returns moves further away from normality. These deregulation-induced changes hold true for all three markets and for most of nine contracts. We interpret our findings as evidence that foreign exchange deregulation encourages more participation and hence more competition, leading to a more efficient and unpredictable exchange rate in each currency market.

Managing the renminbi: should China peg to a trade-weighted basket?

Pegging the renminbi (RMB) to the US dollar since 1994 has characterised China's exchange rate policy under a fixed peg or appreciating crawling peg. The current policy, announced in June 2010, of ‘floating with reference to a basket’ made the RMB 25 per cent stronger against a trade-weighted basket by early August 2015, while it was 10 per cent stronger against the US dollar. Thus, 14 percentage points arose from changes in the cross rates of the other currencies, notably from the fall of the euro since December 2014. Devaluation of the RMB by 3 per cent in August 2015 just covered the effective appreciation since December 2014. Effects of the cross rates of other currencies could be eliminated by managing the external value of the RMB with reference to a genuine trade-weighted basket. This could be a suitable intermediary exchange rate regime for China, as the risks associated with free floating are still great. Diversifying further the currency composition of the foreign exchange reserves and other foreign assets of the Chinese government, from US dollars towards euro and yen assets, would be a natural parallel shift. The euro–US dollar–yen exchange rates in late summer 2015 may offer a good opportunity to carry out this move.

Exchange Rate Effects on Equity Prices: The Recent Case from Japan

This paper investigates recent effects between the yen-US dollar exchange rate and Japanese stock prices. Applying bivariate Bayesian Vector Autoregressive (VAR) models, we obtain several clear findings. First, (1) our analyses using Bayesian VAR models find that, in our recent sample period, the first lags of the yen-dollar exchange rate are statistically significant in explaining four stock index prices of the Tokyo Stock Price Index (TOPIX), Tokyo Stock Exchange (TSE) Second Section stock index, TOPIX Large 70 stock index, and TOPIX Small stock index in Japan. Second, (2) our impulse response analyses find that, in our recent sample period, the above four stock index prices clearly respond to the shock in the yen-dollar exchange rate whilst the exchange rate little responds to the shock in these stock prices. Therefore, our results suggest that, in the recent years, past yen-dollar exchange rate series much more strongly affect Japanese stock prices whilst past Japanese stock price series have little effect on the yen-dollar exchange rate movements. Moreover, (3) our analyses of the time-varying correlation coefficients between the exchange rate changes and Japanese stock returns reveal that the contemporaneous correlations between them become much higher in the recent years.

Foreign exchange market interventions and the $–¥ exchange rate in the long run

This article examines whether foreign exchange market interventions conducted by the Bank of Japan are important for the dollar–yen exchange rate in the long run. We rely on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we focus on two new questions. First, does the consideration of periods of massive interventions in the foreign exchange market uncover a potential long-run relationship between the exchange rate and its fundamentals? Second, do Forex interventions support the adjustment towards a long-run equilibrium value? Our results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated forex interventions. Our results indicate that only coordinated interventions seem to stabilize the dollar–yen exchange rate in a long-run perspective.

Foreign Exchange Market Interventions and the $-¥ Exchange Rate in the Long Run

This paper tries to clarify the question of whether foreign exchange market interventions conducted by the Bank of Japan are important for the dollar-yen exchange rate in the long run. Our strategy relies on a re-examination of the empirical performance of a monetary exchange rate model. This is basically not a new topic; however, we put our focus on two new questions. Firstly, does the consideration of periods of massive interventions in the foreign exchange market help to uncover a potential long-run relationship between the exchange rate and its fundamentals? Secondly, do Forex interventions support the adjustment towards a long-run equilibrium value? Our overall results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long-run relationship to a significant degree. Furthermore, Forex interventions increase the speed of adjustment towards long-run equilibrium in some periods, particularly in periods of coordinated forex interventions. Our results indicate that only coordinated interventions seem to stabilize the dollar-yen exchange rate in a long-run perspective. This is a novel contribution to the literature.

U.S. Intervention: Assessing the Probability of Success

This paper estimates the unconditional and conditional probabilities that U.S. interventions successfully smooth short-term mark-dollar and yen-dollar exchange rates. The sample period extends from February 1987 to February 1990. Assuming a binomial distribution, the number of observed successes usually is greater than one would expect to see randomly. Results from a logit model suggest that coordinated intervention has a higher probability of success than unilateral intervention. The probability of success also increases with the dollar amount of an intervention. Other conditioning variables are not significant. The paper presents a reaction function, with adjustments for the incidentally truncated nature of intervention data. Predicted values serve as instruments for intervention in the logit models.

Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model.

The Effectiveness of Foreign Exchange Market Intervention: A Review of Post-2001 Studies on Japan

Post-2001 studies on Japanese official intervention, though divergent in results, generally support the effectiveness of daily intervention in influencing yen-dollar exchange rate returns. Studies are less conclusive about the impact on volatility. Any impact of intervention appears to be short-lived and a reversal of the initial impact to occur on subsequent days, suggesting market microstructure as the primary channel: intervention acts like any other information and works through order flows. The overriding message of the literature is that the impact of intervention depends on the conditions under which it takes place. Each intervention is thus a unique event. This explains why econometric tests of the average impact of intervention yield mixed results.

Dynamic characteristics of the daily yen–dollar exchange rate

This paper explores various dynamic properties of daily data for the yen–dollar exchange rate. This empirical study shows that quantitative information articulated with technical trading acts as market-based indicators, thus contributing to the modelling of daily fluctuations in the exchange rate. Value-at-Risk analysis is also performed to demonstrate that allowing for data properties such as skewness is essential for representing the underlying volatility of the yen–dollar rate.

Contradiction Resolution of Competitive and Input Neurons to Improve Prediction and Visualization Performance

In this paper, we propose a new type of informationtheoretic method to resolve the contradiction observed in competitive and input neurons. For competitive neurons, contradiction between self-evaluation (individuality) and outer-evaluation (collectivity) exists, which is reduced to realize the self-organizing maps. For input neurons, there exists contradiction between the use of many and few input neurons. We try to realize a situation where as many input neurons as possible are used, and at the same time, another where only a few input neurons are used. This contradictory situation can be resolved by viewing input neurons on different levels, namely, the individual and average level. We applied contradiction resolution to two data sets, namely, the Japanese short term economy survey (Tankan) and Dollar-Yen exchange rates. In both data sets, we succeeded in improving the prediction performance. Many input neurons were used on average, but a few input neurons were only taken for each input pattern. In addition, connection weights were condensed into a small number of distinct groups for better prediction and interpretation performance.

Contradiction Resolution between Self and Outer Evaluation for Supervised Multi-Layered Neural Networks

In this paper, we propose a new type of informationtheoretic method. We suppose that a neuron should be evaluated from different points of view to precisely discern its properties. In this paper, we restrict ourselves to two types of evaluation methods for neurons, namely, self and outer-evaluation. A neuron fires only as a result of evaluating itself, while the neuron can fire as a result of evaluation by all surrounding neurons. Selfand outer-evaluation should be equivalent to each other. When contradiction between two types of evaluation exists, the contradiction should be as small as possible. Contradiction between self- and outer-evaluations is realized in terms of the Kullback- Leibler divergence between two types of neurons. Contradiction between self- and outer-evaluation can be resolved by decreasing the contradiction ratio between the two types of evaluation in terms of KL divergence. This method is expected to extract the main features in input patterns, if those are shared by two types of evaluation. We applied the method to two data sets, namely, the logistic and dollar-yen exchange rate data. In both problems, experimental results showed that visualization performance could be improved, leading to clearer class structure for both problems. In addition, when visualization was improved, generalization performance did not necessarily degrade, showing the possibility of networks with better visualization and prediction performance.

Reassessing the link between the Japanese yen and emerging Asian currencies

We reassess the degree of exchange rate co-movement between the Japanese yen and five emerging Asian currencies relative to the US dollar in the 2000s. It is often claimed that these currencies have been closely tied with the Japanese yen possibly due to active interactions of Japan and emerging Asian economies. We question the validity of such claims, reporting substantially lower, even negative, dynamic conditional correlations between these currencies and the yen-dollar exchange rate in the second half of the 2000s. Our novel multivariate GARCH framework identifies the liquidity deterioration, measured by the TED spread, and the elevated risk aversion, measured by the sovereign CDS premium, in international capital markets as the two major driving forces of such decoupling phenomena.