Suppose the spot and three-month forward rates for the yen are 79.70 and 79.04, respectively.

What would you estimate is the difference between the annual inflation rates of the United States and Japan? (Negative amount should be indicated by a minus sign. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

US - Japan = (79.70 - 79.04) / 79.04

= 0.8350%

Annual inflation rate differential = [( 1 + 0.008350) ^ 4] - 1

= 1.0338 - 1

= 3.38% (THIS IS incorrect )