The First Arrow Hitting the Currency Target: A Long-run Risk Perspective

Takashi Kano, 隆 加納, タカシ カノウ, Kenji Wada and 健司 和田

No HIAS-E-13, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: This paper reconsiders the successful currency outcome of the first arrow of the Abenomics. The Japanese yen depreciation against the U.S. dollar after the introduction of the first arrow comoves tightly with long-term yield differentials between Japan and the United States. The estimated term structure of the sensitivity of the currency return of the Japanese yen to the two-country interest rate differential indeed shifts up and becomes steeper after the onset of the Abenomics. To explain this structural change in the term structure of the Fama regression coeffiient, we employ a long-run risk model endowed with real and nominal conditional volatilities as in Bansal and Shaliastovich (2013). Under a plausible calibration, the model replicates the structural change when nominal uncertainty dominates real uncertainty in the U.S. bond market. We conjecture that the arrow was shot off from the U.S. side, not the Japan side.

Keywords: Japanese yen/U.S. dollar exchange rate; Term structure; Fama regression; Long-run risk; Abenomics (search for similar items in EconPapers)
JEL-codes: E31 E37 F41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2015-11-09
New Economics Papers: this item is included in nep-mac and nep-mon
Note: Current Draft: November 9, 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/27562/070_hiasDP-E-13.pdf

Related works:
Journal Article: The first arrow hitting the currency target: A long-run risk perspective (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-13

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