Journal of Business & Economic Policy

Can Depreciation of the Currency Cause Rise in Domestic Prices? Recent Japanese Case
Yutaka Kurihara, Hideo Fujiwara, Akio Fukushima, Ken-ichiro Oohama

Abstract
In 2022, domestic prices have been rising rapidly all over the world including Japan. It is thought that the rise in domestic prices was triggered by oil prices rising, but there is also a view that the depreciation of its own currency brought by the rise in U.S. interest rates is the cause of the rise in prices. Exchange rates are usually determined by many factors, at times changes in exchange rates influence prices. Moreover, short-term factors and long-term factors have impacts on exchange rates respectively. This study employs two typical theories for exchange rate determination, namely, purchasing power parity (PPP) and monetary approach, and examines whether these theories are suitable for the determinations of exchange rates of the Japanese yen against the US dollar. The results show that it is unlikely that domestic prices in Japan will rise significantly due to the depreciation of the yen unless crude oil and resource energy prices rise abnormally.

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