A Study of the Yen-Dollar Exchange Rate

After the breakdown of the Bretton Woods system in 1971, the yen exchange rate was allowed to float freely. For the past two decades, the yen has appreciated significantly, accompanied by an increasing current account surplus in Japan. In this study, the yen-dollar bilateral rate is examined using a synthesised model that is based on the Flexible-Price Monetary approach to exchange rate determination, but with a wealth term included. The regression analysis shows that all coefficients have the hypothesised signs and are significant. However, the test statistics indicate that there might be potential model mis-specification and/or autocorrelation problems. 1 INTRODUCTION The yen has floated freely since the breakdown of the Bretton Woods system in 1971. As Japan is an open economy, with imports accounting for around 20% of GDP, the value of the yen can have a significant impact on domestic demand and inflation. Also, Japan's export sector includes many of the more rapidly expanding in..