One effect of yen depreciation is to boost the international profits of Japanese exporting firms (denominated in yen) and hence the equity value of those firms. Because Japanese firms in many key industries are relatively export-oriented, this channel of transmission from the yen to the Nikkei may well be quite large.

While our interest lies in determining the impact of changes in the yen on the Nikkei, direct estimation of this relationship would likely result in biased measures of the Nikkei’s reaction because the Nikkei is driven by many factors, some of which also affect the exchange rate. For instance, accommodative monetary policy affects Japanese firms’ international profits (via the yen) as well as their domestic profits (via higher consumption and investment), making the specific role of the yen in driving the overall value of Japanese firms difficult to measure. Consequently, we want to isolate those movements of the Nikkei that can be ascribed solely to the influence of the yen and no other factors.

[…] The results indicate that the response of changes in the Nikkei to changes in the yen fall in a range of about 1.4 to 1.9 percent. That is, a one percent depreciation of the yen tends to increase the Nikkei by 1.4 to 1.9 percent.