Macroeconomic policy, foreign hedging, and exchange rate

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Macroeconomic policy, foreign hedging, and exchange rate

 

Author: Chen, Bing Ming
Title: Macroeconomic policy, foreign hedging, and exchange rate
Degree: D.B.A.
Year: 2017
Subject: Hong Kong Polytechnic University -- Dissertations
Monetary policy -- Japan -- History -- 21st century
Foreign exchange rates -- Japan -- History -- 21st century
Department: Faculty of Business
Pages: 63 pages : illustrations
OneSearch: https://www.lib.polyu.edu.hk/bib/99102198
URI: http://theses.lib.polyu.edu.hk/handle/200/9155
Abstract: Governments may adopt monetary and/or fiscal policies to influence exchange rates in driving economic growth. Abenomics, an economic policy that consists of monetary policy, fiscal policy and structural reform announced in January 2013 to put the Japanese economy out of deflation and low economic growth, is without doubt one of the most recent notable macroeconomic policies that aims to stimulate the economy in Japan and to adjust the overvaluation of Japanese Yen. In this paper, we study the impact of Abenomics on the price of YEN/USD to better understand which channel has the most significant effect on the exchange rate dynamics. After the announcement of Abenomics, Nikkei rose from 11000 to 17500 level and YEN/USD rose from 86 to 118 between January 2013 to December 2014. Especially, from December 2012 to May 2013, YEN/USD jumped from 82 to 101, a 23% depreciation of Yen in merely 6 months. To explore the reasons behind the meteoric rise of YEN/USD within such a short period of time, we ask the following questions: Is there any relationship between the rise of Nikkei and the fall of Japanese Yen against US dollar? Who is the main seller of Japanese Yen against US dollar during this period of time? What is the purpose of this selling of Japanese Yen against US dollar? We discover that the foreigner equity hedging by selling (buying) Japanese Yen against US dollar when their Japanese equity holdings increase (decrease) in value is the most significant factor affecting the price of YEN/USD. Foreign equity hedging also helps explain why the Nikkei index and the value of Japanese Yen against US dollar are inversely related. The purchasing power parity has a long-term effect, but no short-term impact. Our study thus points to foreign equity hedging as an important determinant of short-term exchange rate dynamics of YEN/USD.

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