Recent Comovements of the Yen-US Dollar Exchange Rate and Stock Prices in Japan

Abstract

This paper examines the recent relations of the yen/US dollar exchange rate and stock prices in Japan. Using bivariate Bayesian Vector Autoregressive (VAR) models, we derive several interesting findings as follows. First, 1) our analyses by Bayesian VAR models clarify that recently, the daily lags of the yen/dollar exchange rate series statistically significantly explain the evolution of the Nikkei 225, Nikkei 500, Japan Securities Dealers Association Quotation (JASDAQ), and Tokyo Stock Price Index (TOPIX) Core 30 stock index prices in Japan. Second, 2) our impulse response analyses reveal that Japanese stock prices clearly respond to the yen/dollar exchange rate changes in the recent years whilst the exchange rate changes little respond to the stock prices in Japan. As above our results demonstrate, recently, the past yen/dollar exchange rate time-series much more affect the evolution of the Japanese stock prices whilst the past Japanese stock price series little affect the yen/dollar exchange rate changes. Moreover, 3) analyzing the time-varying correlation coefficients between the yen/dollar exchange rate changes and Japanese stock returns, we also find the large increases in the contemporaneous correlations between the exchange rate and stock returns in the recent years in Japan.