Many observers view yen depreciation as one of the most effective policy options to stimulate aggregate demand in Japan. The paper empirically examines this view using a simple vector autoregression (VAR) model of the exchange rate, exports, imports and interest rates (or real output). When the full sample of 1975-2001 is used, an exchange rate (yen depreciation) shock is followed by a substantial decrease in imports, while no significant effects on exports are detected. Exchange rate shocks have a certain impact on exports before the mid 1980s when the Plaza Agreement took place. A formal stability analysis also supports the presence of a possible structural shift in the reduced form model. These results suggest that the argument that yen depreciation will increase exports and jump-start the economy may not be as valid as many would believe. More careful discussions are needed in evaluating policy alternatives that can help attain sustained economic recovery in Japan.