My previous post on the Japanese safe haven question elicited a variety of interesting comments. Further research suggests that Japanese stocks do indeed tend to fall when the yen strengthens for \
My previous post on the Japanese safe haven question elicited a variety of interesting comments. Further research suggests that Japanese stocks do indeed tend to fall when the yen strengthens for “safe haven” reasons. That’s certainly an odd reaction.
I think there’s a much better explanation for the response of Japanese asset prices to global shocks—monetary policy. Suppose that a bearish global shock reduces the equilibrium global real interest rate. Also suppose that Japan fails to respond to this change by reducing their monetary policy target interest rate, and also refuses to take other monetary steps such as depreciating the yen. In that case, the target interest rate would rise relative to the (now falling) natural rate of interest.
