International monetary policy spillovers between Japan and the Rest of the World: A GVAR Framework

We evaluate the impact of international monetary policy spillovers from the US and China on the real exchange rate of Japan. While China remains the top largest trading partner to Japan, the US occupies the second position, indicating potential policy spillovers from these countries to Japan. Adopting the GVAR modelling technique, the outcomes from our findings suggest: (i) the US monetary policy shocks significantly affect Japanese foreign exchange dynamics, causing Yen to depreciate in the instance of a positive shock to US monetary policy; (ii) monetary policy shocks from China and the Euro Area do not constitute a considerable swing in Yen’s exchange rate; (iii) the US monetary policy shock is insignificant in influencing monetary policy conduct of Japan, at least in the short term; (iv) these findings are robust to calm and turbulent periods. Thus, we offer the implications of our findings for policymakers and investors seeking stability as a macroeconomic goal and a stable economy for investment.