Estimating Systematic and Partial Exchange Rate Exposures: The Case of Japanese Firms

We decompose exchange rate exposure into systematic and partial parts. The former is the product of the exposure of the market portfolio and a firm’s market beta, reflecting the risk of the exchange rate to a macroeconomy. The latter is the residual one that most previous studies have examined. Using Japanese data, we find that Japanese firms are systematically exposed to the exchange rate from the beginning of 2000. We also highlight the timely yen-selling intervention by the Bank of Japan when the firms are systematically exposed. However, we find that, even when most Japanese firms are significantly exposed to the exchange rate, the partial exposure can seriously underestimate the full extent of the exchange rate exposure.