Is the Real Exchange Rate a Transmission Channel of the Japanese Monetary Policy? A Statistical-Mathematical Analysis

The recent events in Japan have brought back the debate on the effectiveness of economic policy measures taken by the authorities of that country to tackle the crisis of the Lost Decade. In this manuscript, we deal with Japanese monetary policy and, more specifically, our aim is to assess whether the real exchange rate represents a transmission channel of the monetary stimuli of the Bank of Japan. This possibility has been previously discussed by other researchers without being empirically checked. To accomplish this task, we employ a proper statistical-mathematical approach consisting of a Structural Vector Error Correction (SVEC) analysis. We write down and identify our model relying on the Monetary Approach to the Balance of Payments, and then we estimate it through quarterly time series data in the sample period Q1 1994 – Q1 2022. Our results indicate that, contrary to what has been suggested by the established literature, the real exchange rate is a relevant transmission channel of Japanese monetary policy only in the short-run. We discuss the policy implications arising from this outcome.