Michael W. Keran
The purpose of this paper is to examine the exchange value of the yen since the movement to flexible exchange rates. The paper is divided into two sections. The first, which is concerned with exchange-rate policy, explores the views of the Japanese government on intervention in the exchange market. The second section deals with exchange-rate determination and, in particular, with the dominant market forces operating on the exchange rate.
The conclusions to be drawn from the first section are that the Japanese have gradually withdrawn from the position of determining a target exchange rate and that, as a result, market forces have played an increasingly important role in the determination of the exchange rate. In the second section it will be shown that the most important market forces determining the exchange rate are the underlying monetary disturbances determined by monetary policy in the United States and Japan and real shocks affecting the terms of trade associated, in particular, in recent years with the price of oil.
Has Japan attempted to manage its exchange rate since 1973 as a deliberate instrument of policy, or was the exchange rate determined primarily in the marketplace by the normal forces of supply and demand? If market forces dominated, this does not, of course, rule out the fact that macroeconomic policies (but not exchange-rate policies per se) were an important element in influencing the exchange rate.
Exchange-Rate Strategies. There are at least three potential strategies for foreign exchange-market intervention: (1) to prevent disorderly
The views expressed in this paper are those of the author and not necessarily those of the Federal Reserve Bank of San Francisco or the Federal Reserve System.