We investigate the dynamic interrelations between Korean economy and Japanese economy. We set up a small open economy model to derive the purchasing power parity, the interest rate parity, the Fisher inflation parity, and an output gap relation. They are used as restrictions on the cointegration space of a structural vector error correction model. We then employ generalized impulse response analysis to assess the dynamic effects of shocks in output and interest rates from Japan. Generalized impulse response functions reveal that there are significant spillover effects of shocks to the Japan economy on Korea.