Exchange Rate as Monetary Policy Channel (in Japanese)

Although the Bank of Japan has recently (in 2003) conducted an expansionary monetary policy that targets the current accounts balance, additional monetary policies aimed at overcoming the deflationary situation may be necessary. No monetary vehicle to stimulate the economy under the "zero interest rate" situation, however, exists. In such circumstances, the maintenance of monetary policy through the exchange rate channel is preferred. To investigate this channel, we must understand the validity of various theories of exchange rate determination. In this paper, considering the "Soros Chart" that explains exchange rates in the 1990s, we focus on a monetary approach to exchange rate, and investigate the impact of inflation expectations on exchange rates. On the basis of this viewpoint, we analyzed the factors determining the exchange rate by using a vector autoregressive model (VAR), co-integration analysis, and a vector error correction model (VECM). We obtained the following results. First, the monetary base explains exchange rates better than the money supply does. Second, the differences of inflation expectations and monetary bases between Japan and the United States have a significant effect on exchange rates. Third, sterilized intervention without changing the monetary base and the intervention index compiled by "Foreign Exchange Intervention Operations" have no significant effect on exchange rates. The above results suggest that the expansion of the monetary base, such as non-sterilized intervention and increasing the outright purchase of long-term government bonds, and inflation targeting to change the expectations of the public still constitute effective monetary policy. This paper does not fully analyze the impact of exchange rate depreciation on economic activity and means of monetary base expansion and change of inflation expectations. Nonetheless, monetary policy through the exchange rate channel is still effective.