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

Listed author(s):
  • KANO, Takashi
  • WADA, Kenji

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.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27562/1/070_hiasDP-E-13.pdf
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Paper provided by Hitotsubashi Institute for Advanced Study, Hitotsubashi University in its series Discussion paper series with number HIAS-E-13.

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Length: 20, [5] p.
Date of creation: 09 Nov 2015
Handle: RePEc:hit:hiasdp:hias-e-13
Note: Current Draft: November 9, 2015
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  1. Kano, Takashi & Morita, Hiroshi, 2015. "An Equilibrium Foundation of the Soros Chart," Discussion Papers 2014-07, Graduate School of Economics, Hitotsubashi University.
  2. Fujiwara, Ippei & Nakazono, Yoshiyuki & Ueda, Kozo, 2015. "Policy regime change against chronic deflation? Policy option under a long-term liquidity trap," Journal of the Japanese and International Economies, Elsevier, vol. 37(C), pages 59-81.
  3. Kazuo Ueda, 2013. "Response of Asset Prices to Monetary Policy under Abenomics," Asian Economic Policy Review, Japan Center for Economic Research, vol. 8(2), pages 252-269, December.
  4. Ravi Bansal & Amir Yaron, 2000. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," NBER Working Papers 8059, National Bureau of Economic Research, Inc.
  5. Kazuo Ueda, 2013. "The Response of Asset Prices to Monetary Policy under Abenomics," CIRJE F-Series CIRJE-F-894, CIRJE, Faculty of Economics, University of Tokyo.
  6. Ralph S. J. Koijen & Hanno Lustig & Stijn Van Nieuwerburgh & Adrien Verdelhan, 2010. "Long Run Risk, the Wealth-Consumption Ratio, and the Temporal Pricing of Risk," American Economic Review, American Economic Association, vol. 100(2), pages 552-556, May.
  7. Tobias Adrian & Emanuel Moench, 2008. "Pricing the term structure with linear regressions," Staff Reports 340, Federal Reserve Bank of New York.
  8. Ravi Bansal & Ivan Shaliastovich, 2013. "A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets," Review of Financial Studies, Society for Financial Studies, vol. 26(1), pages 1-33.
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