Currency Devaluation and Price Expectation:Lessons from Okinawa in the 1970s(in Japanese)

Satoshi Shimizutani and Tatsuhiro Yogi

ESRI Discussion paper series from Economic and Social Research Institute (ESRI)

Abstract: Yen depreciation is often proposed to combat the deflation in Japan. However, there has been surprisingly little empirical research on how price expectation is affected by currency depreciation. This paper focuses on an unusual experience in Okinawan history to evaluate the effect of devaluation on inflation expectations. Until the handover of Okinawa to the mainland of Japan in May, 1972, Okinawa's legal currency was the U.S. dollar. During the period, the Nixon shock of August, 1971 caused a dramatic devaluation of the dollar. Our estimates demonstrate that the devaluation increased price expectations by 5 to 7%. The lesson from this experience is that currency devaluation affects price expectation significantly. Although there are certainly differences in the economic situation of Okinawa in the 1970s and present day Japan, our findings suggest that yen depreciation could be an effective way to overcome the current deflationary pressure in Japan.

Pages: 30 pages
Date: 2003-04
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Citations: View citations in EconPapers (1)

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