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Japan's Unconventional Monetary Policy and the Exchange Rate Dynamics

Author

Listed:
  • Kota Ikkatai

    (Bank of Japan)

  • Takuji Kawamoto

    (Bank of Japan)

  • Kenichi Sakura

    (Bank of Japan)

Abstract

This paper empirically examines the response of the nominal exchange rate (U.S. dollar-yen exchange rate) to the monetary policy changes, focusing on the effects of various unconventional monetary policy measures implemented by the Bank of Japan over the past 25 years. Specifically, applying the estimation method proposed by Inoue and Rossi (2019), we identify Japan's "monetary policy shocks" from changes in the entire yield curve and the exchange rate around policy announcements, and estimate the dynamic response of the exchange rate to them. The results show that the yen depreciated against the U.S. dollar in many cases in response to Japan's expansionary monetary policy shocks, and that non-interest rate differential channel - e.g., the shifts in future exchange rate expectations - accounts for the larger parts of such responses than conventional interest rate differential channel. Moreover, our findings suggest that the responses of the exchange rate to unconventional monetary policies have been state-dependent in the sense that they could vary significantly depending on global financial market conditions and investors' herding behavior at each point in time.

Suggested Citation

  • Kota Ikkatai & Takuji Kawamoto & Kenichi Sakura, 2024. "Japan's Unconventional Monetary Policy and the Exchange Rate Dynamics," Bank of Japan Working Paper Series 24-E-23, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp24e23
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Unconventional monetary policy; Exchange rate; Functional local projection;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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