Economics and Business
Quarterly Reviews
ISSN 2775-9237 (Online)
Published: 05 February 2025
Effect of Exchange Rate Path-through on Inflation: Recent Japanese Case
Yutaka Kurihara
Aichi University, Japan
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10.31014/aior.1992.08.01.645
Pages: 1-8
Keywords: Depreciation, Exchange Rate, Inflation, Japan, Yen
Abstract
After the burst of the bubble economy in the mid-1990s, when stock and land prices plummeted in Japan, the country had been in a deflationary trend for about 30 years, with the inflation rate hovering around 0%. In 2022, however, sudden increases in the prices of food and utilities, coupled with little increase in wages, made life difficult for people. The beginning of the price increase is attributed to Russia`s invasion of Ukraine in February 2022. This crisis in Ukraine caused food and energy prices to rise. In addition, the interest rate differential between the U.S. and Japan had widened, Japanese yen weakened, and import prices rose, leading to a broad-based price increase in Japan. Moreover, in 2022, the Japanese government announced the "With Corona" policy, which played a pivotal role in both preventing the spread of infection and promoting economic activity, leading to some recovery in economic activity and an acceleration of labor shortages. This was followed by a movement to raise wages. The purpose of this study is to examine the factors behind price increases in Japan. While many believe that the weak yen is the biggest factor behind the price increases, this study uses statistical analysis to test this view. Empirical analyses show that the depreciation of the yen led to higher prices in Japan, but no significant relationship was found between prices and the industrial production index, nor between prices and the policy interest rate. Furthermore, there was no evidence that wage increases caused price increases.
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