The Impact of a Net Increase in Japanese Investment in Foreign Assets on the Yen Rate

The yenÂ's value on a real effective exchange rate basis has already fallen to its lowest level since the 1985 Plaza Accord. In particular, Japanese retail investors have recently tried to diversify their portfolio by purchasing higher-yielding assets denominated in a foreign currency through investment trust funds. In this paper, we examine the effect of a net increase in the foreign investment by Japanese investors on the exchange rate by using the structural vector autoregression (SVAR) method. Our empirical results suggest that a net increase in the investments by Japanese investors can significantly depreciate the yen rate. Moreover, we found that the main factor responsible for the movements of the yen rate against the dollar is demand shock. This result implies that the main reason for the depreciation of the yen is the weak Japanese demand. If the Japanese domestic demand expands further, the yen rate will appreciate more.