Interventions and Japanese Economic Recovery

This paper attempts to explain possible reasons and objectives behind the 35 trillion yen (7% of GDP) interventions conducted by the Japanese monetary authorities from January 2003 to March 2004, and to discuss whether the interventions achieved the presumed objectives: making the movement of the yen flexible but orderly, and helping economic recovery. The motivation of starting intervention in January 2003 was to keep the yen from appreciating in the midst of financial and macroeconomic weakness. The economy started to show some strength in the second half of 2003, but interventions continued, with a brief pause in September. Reasons for interventions after September are two-fold. First, the interventions provided opportunities for unsterilized interventions. Second, the monetary authorities were extremely sensitive to speculative activities in the market.Intervention of foreign exchange market, the yen, monetary policy, Japanese economy

Use of (Time-Domain) Vector Autoregressions to Test Uncovered Interest Parity

In this paper, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot exchange rate (yen/dollar), the domestic (US) interest rate and the foreign (Japanese) interest rate, describing the interdependence of the domestic and international financia lmarkets. Uncovered interest parity is stated as a null hypothesis that the current difference between the two interest rates is equal to the difference between the expected future (log of) exchange rate and the (log of) current spot exchange rate. Note that the VAR system will yield the expected future spot exchange rate as a k-step ahead unconditional prediction. Hence, the null hypothesis is stated as nonlinear cross-equational restrictions for the three-equation VAR system. Then UIP is tested by the Wald test between the unrestricted and restricted systems. A test of UIP with a maintained hypothesis of covered interest parity, becomes a hypothesis test of efficiency without risk premium, that is,the forward exchange rate isthe unbiased predictor of the future spot exchange rate, and information is efficiently used in its prediction. Our results are compared to the efficiency test with a single equation using the Hansen-Hodrick procedure for the same data set.

International Impacts on Domestic Political Economy: A Case of Japanese General Elections

The objective of this paper is twofold. First, this paper emphasizes that in a parliamentary system, such as in Japan, election timings become endogenous, in that good economic performances tend to trigger elections. Second, impacts of international factors, such as foreign exchange reserves and elections of the United States, on domestic economic performances will be examined in the context of political business cycles. This paper finds only a limited link between economic performances and international variables, except one that upcoming elections in the United States tend to cause a higher rate of growth in Japan. Evidence suggests that although blatant policies, such as a beggar-thy-neighbor policy, were not adopted, a more subtle international cooperation, in the form of Japanese expansion to pill up the United States economy, have been used.

Capital Controls and Covered Interest Parity

This paper examines covered interest parity between Yen-denominated and dollar-denominated assets: Euro-yen and Euro-dollar three month deposit rates,and the representative and comparable three-month interest rates in Japan andin the U.S. An objective of this paper is to single out the portion of deviations from covered interest parity that is caused by capital controls imposed by the Japanese authority.To that end, new measures of one-way arbitrage gain are defined taking into account transactions costs associatedwith the bid-ask spread of exchange rates and the transactions tax on repurchase agreements, Gensaki, in Japan. According to our measure, covered interest parity has been holding, as theory predicts, in the Euro market since 1977.The Euro-Yen market must have been thin to have caused violations toparity in 1975 and 1976. Capital controls imposed by the Japanese Government are detected by one-way arbitrage measures between Gensaki in Japan and Euro-Dollar deposits between 1975 and 1980.After a new law was enacted in December 1980 which lifted most capital controls, covered interest parity has been holding between Gensaki and dollar-denominated assets.

Foreign Exchange Rate Expectations: Micro Survey Data

This paper analyzes the panel data of bi-weekly surveys, conducted by the Japan Center for International Finance, on the yen/dollar exchange rate expectations of forty-four institutions for two years. There are three major findings in this paper. First, market participants are found to be heterogeneous. There are significant "individual effects" in their expectation formation. Second, many institutions are found to violate the rational expectation hypothesis. Third, forecasts with long horizons showed less yen appreciation than those with short horizons. Cross-equation constraints implied by the consistencyof the forecast term structure are strongly rejected in the data.

Endogenous Election Timings and Political Business Cycles in Japan

This paper constructs a theoretical model of political business cycles in a Parliamentary system and tests predictions and hypotheses of a theoretical model against the post-war Japanese data. Unlike in a presidential system, the timing of a general election is an endogenous policy variable in a parliamentary system. Thus, one of the interesting questions in a parliamentary system is whether elections cause business cycles or economic expansions trigger general elections. Empirical analyses of the post-war Japanese experience strongly indicate that the Japanese government did not manipulate policies in anticipation of approaching elections as political business cycle theories in a presidential system indicate. Instead, general elections were usually held during times of autonomous economic expansion. In other words, the Japanese government opportunistically manipulated the timing of elections rather than the economy.

Is Foreign Exchange Intervention Effective?: The Japanese Experiences in the 1990s

This paper examines Japanese foreign exchanges interventions from April 1991 to March 2001 based on newly disclosed official data. All the yen-selling (dollar-purchasing) interventions were carried out when the yen/dollar rate was below 125, while all the yen-purchasing (dollar-selling) interventions were carried out when the yen/dollar was above 125. The Japanese monetary authorities, by buying the dollar low and selling it high, have produced large profits, in terms of realized capital gains, unrealized capital gains, and carrying (interest rate differential) profits, from interventions during the ten years. Profits amounted to 9 trillion yen (2% of GDP) in 10 years. Interventions are found to be effective in the second half of the 1990s, when daily yen/dollar exchange rate changes were regressed on various factors including interventions. The US interventions in the 1990s were always accompanied by the Japanese interventions. The joint interventions were found to be 20-50 times more effective than the Japanese unilateral interventions. Japanese interventions were found to be prompted by rapid changes in the yen/dollar rate and the deviation from the long-run mean (say, 125 yen). The interventions in the second half were less predictable than the first half.