Can Economic Policy Uncertainty Explain Changes in the Yen/US Dollar Risk Premium?

The risk premium is the additional return above uncovered interest rate parity risk-averse foreign investors require to hold domestic assets. This premium is well-known to vary over time, although an economic explanation of this variation has largely proved elusive. In this paper, we propose a disaggregated measures of economic policy uncertainty as alternative economic explanations for the risk premium. In particular, we find that monetary policy uncertainty in both Japan and the US contribute significantly to movements in the risk premium on the Japanese yen since the mid-1990s. JEL Classification Nos: G14, G15, F36