An Australia-based fixed-income investment manager is deciding how to allocate her portfolio between Australia and Japan. (As before, the AUD is the domestic currency.) Australias one-year deposit rate is 5%, considerably higher than Japans at 1%, but the Australian dollar is estimated to be roughly 10% overvalued relative to the Japanese yen based on purchasing power parity. Before making her asset allocation, the investment manager considers the implications of interest rate differentials and PPP imbalances. All else equal, which of the following events would restore the Australian dollar to its PPP value?

		The Japanese inflation rate increases by 4%.
		The Australian inflation rate decreases by 10%.
		The JPY/AUD exchange rate declines by 10%.
		The Japanese inflation rate increases by 12%.