A Study On Misalignment Of Japanese Yen's Real Exchange Rate

When talking about Asia financial crisis broken out several years ago, people still keep quite fear about it. This crisis began with currency crisis, that is, continuous overvaluation of the currencies in this area gave hedging funds great opportunities to crash the weak currencies, which led to the crisis. As the most important currency in this area and one of the three global currencies, Japanese Yen plays a very important role in financial and economic development of Asia even the whole world. If we want to seek the ultimate causes of financial crises, some questions should first be answered: What have caused the exchange rate's acute fluctuations of Japanese Yen? Whether have the fluctuations deviated greatly from the actual exchange rate determined by the real economic condition and caused misalignment? What's the relationship between Yen's overvaluation and currency crisis? All the above is one of basis in this dissertation. In the other hand, many researches also provide us with theoretical support. Most notably Dornbush, Goldfajn and Valdes have argued that overvaluation according to some price measure is the key determinant of a subsequent currency crash. The detailed study by Kaminsky et al shows that the best indicator of a crisis within the next 24 months is the real exchange rate relative to a trend.As a core of foreign exchange theories, equilibrium exchange rate is the main objective criterion to justify whether misalignment has appeared to the real exchange rate. As continuous overvaluation will lead to currency crisis, if misalignment lasts too long time or the frequency is too high, it'll impact the economic growth of a country. Equilibrium exchange rate now gets much more important in economics and economic policies. The key to get equilibrium exchange rate is to find it's reasonable criterion.Begin with the acute fluctuations of Japanese Yen in a long period, using exiting equilibrium exchange rate theories and models for reference, this dissertation sets up equilibrium real exchange rate model of Japanese Yen, based on which we analyze misalignment and it's reason of Yen's real exchange rate.Based on introducing, analyzing and evaluating of many equilibrium exchange rate theories, we test and conclude that PPP theory doesn't hold for Yen's exchange rate and we can't take the exchange rate calculated based on PPP as equilibrium rate for Japanese Yen.However, PPP's failure to hold doesn't necessarily imply that no equilibrium exists. Economists have found that equilibrium exchange rate is not a point but a trajectory related to internal and external equilibrium. Real exchange rate will fluctuate around a time-varying equilibrium level. Therefore, in section four, we try to seek the equilibrium exchange rate and take it as the criterion to assess Yen's misalignment.At present, researches on equilibrium exchange rate go in two directions. In one direction, people use a theoretical model that implies econometric equations, which may be grouped under the heading NATREX, natural real exchange rate. The other is called BEER, behavioral equilibrium real exchange rate, which attempts to explain the actual behavior of the real exchange rate in terms of a set of relevant explanatory variables, the so-called "fundamentals". In BEER, the underlying theoretical model does not have to be specified, and the exchange rate equilibrium path is then estimated by quantifying the impact of the "fundamentals" on the exchange rate through econometric estimation of the resultant reduced form. By means of the two methods, we set up two equilibrium real exchange rate models of Yen respectively, and then, based on them we analyze misalignment of Yen's real exchange rate. We find that before the year 1999, the two models are almost the same, but after that difference appears. On the basis of our analysis of it's reason, we choose the more suitable BEER model, get long-run equilibrium real exchange rate of Yen and also assess the misalignment of Yen's rate since the beginning of it's fluctuation.In th...