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This paper aims to study the safe haven attribute of the Japanese yen under domestic and U.S. economic and policy uncertainty (EPU). Because of the existence of structural changes, a bootstrap rolling window subsample causality test is used to enhance the credibility of the results. The empirical results confirm that the exchange rate returns (RER) and Japanese EPU are correlated in specific periods when major economic or political events occur. In most crisis periods, the Japanese EPU has positive effects on RER, and the yen appreciates when the EPU is increasing. In addition, the RER of the yen and U.S. EPU are both negatively and positively connected. This finding confirms the hedging function of the yen in certain periods. The reason for this relationship is that Japan's low interest rates make the yen the primary funding currency in speculative carrying trade strategies, and thus, it tends to appreciate during crisis periods regardless of the origins of the EPU shocks. Therefore, the yen can be held as a safe haven currency unless the government intervenes artificially. [ABSTRACT FROM AUTHOR]

According to the article, Japan's economic outlook has been revised upwards for inflation and the policy rate. The Spring Negotiation results have led to higher wage settlements, which are expected to increase inflation to 1.8% by 2027. GDP growth for 2024 is forecasted to be 0.5%. The Bank of Japan (BoJ) has ended its negative interest rate policy and is projected to start raising its policy rate next spring. The pace of rate hikes is uncertain, but there is a possibility of a first rate hike in the second half of 2024. The 10-year JGB rate is expected to gradually rise towards 1.5% in the coming years. Changes in the BoJ's policy outlook will have a modest impact on growth. The outlook for the Japanese yen has been downgraded due to the strength of the US dollar. [Extracted from the article]

This article expands on the Revived Bretton Woods hypothesis, which stresses the willingness of foreign official sectors to accumulate dollar liabilities. The authors first describe the key features of the global economy that underpin their Revived Bretton Woods view. The first is China's ongoing transformation from a centrally planned to a nascent market economy, which has moved hundreds of millions of underemployed workers into the global market for labor. The second is that most successful emerging economies have been net exporters of capital, contradicting the usual assumption that successful development involves poor countries borrowing from rich ones. The third key feature is that the large and growing current account deficit of the U.S. has been funded at low interest rates by foreign private and official lenders. The authors note that Japan has managed its exchange rate for many years as a way of dealing with its own employment problem, and they see some of the other Asian economies as motivated to keep their currencies aligned with China's. The authors expect that China's present financial repression of capital flows and distortion of the real exchange rate will end when the country's industrial sector has grown sufficiently and the domestic financial system has become capable of efficient intermediation.

Abstract--A vector autoregressions model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot yen/dollar exchange rate, the Japanese domestic interest rate, and the Eurodollar interest rate, describing the interdependence of the domestic and international financial markets. The VAR system will yield the expected future spot exchange rate as a k-step ahead prediction. Hence, the null hypothesis, UIP, is stated as nonlinear cross-equational restrictions for the three-variable VAR system, and can be tested using the Wald test. Uncovered interest parity (UIP) is tested in the proposed VAR system. UIP is rejected for a period of strict capital controls, 1973-1977, and accepted for the period of free capital mobility, 1981-1985. Thus, this paper suggests that, as few controls are left on capital flows between the Tokyo and Euro-markets, the yen/dollar foreign exchange market is efficient (without risk premium) in the 1980s. [ABSTRACT FROM AUTHOR]