|Budget Amount *help
¥1,800,000 (Direct Cost: ¥1,800,000)
Fiscal Year 2006: ¥600,000 (Direct Cost: ¥600,000)
Fiscal Year 2005: ¥600,000 (Direct Cost: ¥600,000)
Fiscal Year 2004: ¥600,000 (Direct Cost: ¥600,000)
It is highly important to understand macroeconomic effects of exchange rate policy in Japan in contemplating a possible way to accomplish sustained economic recovery from the prolonged stagnation over the last decade. This research project aims to conduct an extensive empirical research on macroeconomic impacts of Japan's exchange rate policy. To this end, we employ a time-series method and adopt a multivariate vector-autoregressive (VAR) framework. The benchmark model consists of the following four series: GDP gap estimated using a production function approach, exchange rate (yen-dollar rate), interest rate (real call rate), and stock prices (real Nikkei Average). We compute impulse response functions of structural disturbances. The data we use is for the period of 1983-2004.
The main finding of our empirical analysis is that exchange rate shocks (yen depreciation shocks) have a negative impact on GDP gap especially in the medium and long run. To check robustness of our finding, we examine different sample periods (1983-1995, and 1993-2004) and alternative GDP gap series (based on Hodrick and Prescott filter), but the result was unaffected.
Our main results suggest that "spending switch effects" of yen depreciation might be very limited in Japan especially in recent years and possibly outweighed by negative effects such as cost push effects or negative terms of trade effects. This implies that deliberate yen depreciation policy, which was proposed by some economists, is likely to have a very limited effect on the Japanese economy.