The exchange value of the yen will be determined by two types of influences: first, direct government actions through central bank intervention; second, private market behavior. The evidence reviewed here suggests that, although intervention by the Bank of Japan has been substantial, it has been of the leaning-against-the-wind variety. The Japanese government has not systematically attempted to aim for a particular exchange rate. Furthermore, there is circumstantial evidence that this leaning-against-the-wind strategy has not had any significant effect on the monthly average value of the yen-dollar exchange rate.
These propositions suggest that a major portion of the movement in the yen is attributable to private market forces. Given the very sharp fluctuations that have been observed in the yen-dollar rate, the question arises whether this represents private speculation of a steamroller, selffulfilling variety unrelated to underlying fundamentals. The evidence suggests that such is not the case. Much of the movement in the exchange value of the yen in relation to the dollar can be explained by economic fundamentals. Specifically, divergent monetary policies in the United States and Japan explain much of the appreciation of the yen during 1977 and 1978, and real supply-side shocks associated with oil prices explain much of its depreciation during 1979.
The policy implications of this study are clear. As most of the variation in the yen-dollar exchange rate is the result of divergence in monetary policy followed in the United States and Japan, stabilizing the exchange rate is primarily a function of establishing consistent monetary policies between the two countries.
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