Japanese currency and stock market-What happened during the COVID-19 pandemic?

Abstract

This paper examines the relationship between the Japanese Yen and the country's stock returns. Using several variants of econometric models and empirical specifications, we unravel that the depreciation of the Yen vis-à-vis the US dollar led to gains in Japanese stock returns. A one standard deviation depreciation of the Yen during the COVID-19 period (equivalent to 0.588%) improved stock market returns by 71% of average returns We see that this relationship was stronger over the COVID-19 period (January 2020 to August 2020) compared to the pre-crisis period.

Keywords: COVID-19; Exchange rate; Stock returns.

Fig. 1

Plots of key variables. The figure illustrates the line charts for key variables of interest to the paper’s hypothesis that exchange rate returns determine stock price returns of Japan. The variables are SR, which is the log percentage return of the Nikkei price index; ER, which is the log percentage returns of the Yen–US dollar exchange rate specified such that an increase in Yen–US dollar indicates a depreciation of the Yen; $SV$, which is the Nikkei stock average volatility index; and OIL, which is the WTI spot price of oil. The data sample is $04∕1∕2010$ to $16∕8∕2020$.