Purchasing Power Parity and Real Exchange Rate in Japan

This paper examines the validity of both the short-run and long-run purchasing power parity (PPP) hypotheses in Japan using two estimation methods, namely, a unit root test and an Autoregressive Distributed Lag (ARDL) cointegration test. Some important findings are obtained from our analysis. The first test reveals the mean reversion of real exchange rate (RER) in the long-run. On the other hand, from the second test, we found that there is a strongly robust long-run PPP relationship but no significant short-run PPP relationship. Furthermore, unlike the previous literature, this paper confirms the stability of the estimated results by CUSUM and CUSUMQ tests. Overall, the results suggest that PPP hypothesis in Japan strongly holds for the long-run while not for the short-run.