PPP and Exposure Layton Co. (a U.S. firm)

attempts to determine its economic exposure to movements in the Japanese yen by applying regression analysis to data over the last 36 quarters:

SP ¼ b0 þ b1e þ μ

where SP represents the percentage change in Layton’s stock price per quarter, e represents the percentage change in the yen value per quarter, and μ is an error term. Based on the analysis, the b0 coefficient is zero and the b1 coefficient is 0.4 and is statistically significant.

Layton believes that the inflation differential has a major effect on the value of the yen (based on purchasing power parity). The inflation in Japan is expected to rise substantially while the U.S. inflation will remain at a low level. Would you expect that Layton’s value to be favorably affected, unfavorably affected, or not affected by its economic exposure over the next quarter? Explain.