Short-term and Long-Term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data

Jeffrey A. Frankel, Kenneth A. Froot

NBER Working Paper No. 2216 (Also Reprint No. r1044)
Issued in April 1987
NBER Program(s):   ITI   IFM

Three surveys of exchange rate expectations allow us to measure directly the expected rates of return on yen versus dollars. Expectations of yen appreciation against the dollar have been (1) consistently large, (2) variable, and (3) greater than the forward premium, implying that investors were willing to accept a lower expected return on dollar assets. At short-term horizons expectations exhibit bandwagon effects, while at longer-term horizons they show the reverse. A 10 percent yen appreciation generates the expectation of a further appreciation of 2.4 percent over the following week, for example, but a depreciation of 3.4 percent over the following year. At any horizon, investors would do better to reduce the absolute magnitude of expected depreciation. The true spot rate process behaves more like a random walk.

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Document Object Identifier (DOI): 10.3386/w2216

Published: Frankel, Jeffrey A. and Kenneth A. Froot. "Short-term and Long-term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data," From Journal of the Japanese and International Economies, Vol. 1, pp. 249-274,(1987). citation courtesy of