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Abstract

Vol. 54, No. 2, pp. 114-125 (2003)

“The Effects of Yen Depreciation Policy in Japan”
Ryuzo Miyao (Research Institute for Economics and Business Administration, Kobe University)

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.