Anatomy of Sudden Yen Appreciations
IMF Working Papers, July 1, 2019
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- Anatomy of Sudden Yen Appreciations
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Bibliographic details
- Authors: Fei Han, Niklas J Westelius
- Published: July 1, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781498317344.001
Overview and purpose
- Authors: Fei Han, Niklas J Westelius
- Publication: IMF Working Papers, Working Paper No. 2019/136
- Date: July 1, 2019
- Pages: 19
- Volume: 2019
- Issue: 136
- DOI: https://doi.org/10.5089/9781498317344.001
- ISBN: 9781498317344
- ISSN: 1018-5941
- Summary: The paper examines underlying drivers of rapid yen appreciations and highlights the key role of carry-trade and the zero lower bound as important amplifiers.
Key findings
- Macroeconomic associations:
- Yen depreciations are typically associated with increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices.
- Large and sharp yen appreciations risk lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target.
- Amplifiers of sudden appreciations:
- Carry-trade activity and carry-trade reversals are identified as key drivers.
- The zero lower bound on interest rates acts as an important amplifier of appreciation dynamics.
- Methodological note:
- The paper uses econometric analysis methods including Vector autoregression.
Subjects and keywords (as listed)
- Subject: Currencies, Econometric analysis, Exchange rates, Financial institutions, Financial services, Foreign exchange, Futures, Money, Vector autoregression, Zero lower bound
- Keywords: appreciation, carry trade, carry trade activity, carry trade position, carry trade reversal, Currencies, exchange rate appreciations, Exchange rates, Futures, Global, interest rate differential, Japan, safe haven effects, Vector autoregression, WP, yen, yen appreciation, Zero lower bound
Implications for policy and market participants
- Risks from large and sharp yen appreciations:
- Potential to lower inflation expectations and actual inflation.
- Potential to squeeze corporate profits and depress equity prices (negative wealth effects).
- Potential to undermine confidence in the Bank of Japan’s reflation efforts and inflation-target credibility.
- Considerations for policymakers:
- Monitor carry-trade positions and the role of interest rate differentials as sources of vulnerability to sudden appreciation.
- Account for the interaction between the zero lower bound and currency dynamics when designing monetary policy and communication strategies.
Source: "Anatomy of Sudden Yen Appreciations", Fei Han and Niklas J Westelius, IMF Working Papers 2019, 136 (2019).
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- Working Paper