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How is the_japanese_yen

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  • 1. Why is the Japanese Yen so strong? What is its implications for an export-driven economy like Japan? s1150010 Kazuma Arimori
  • 2. ContentsAbstractYen / Dollar Historic TrendsExpected the oppositeTrade Cash FlowInvestment Cash FlowSummaryCurrency TheoryReference
  • 3. AbstractIn summary, the cause for the strengthening of the Yenis that the Yen is a currency with net inflows; more Yenare bought then that there are Yen sold.The reason forthis is the combination of the strengthening trend itself,the Japanese trade surplus, the low return on investmentsin the rest of the world, the expected monetary policy inthe U.S. and the diversification of foreign reserves inother countries away from the U.S. Dollar and Euro. Inan historic perspective, the strengthening of the Yen isnothing new and not unexpected.
  • 4. Yen / Dollar Historic TrendsThe overall trend during the last 20 years in clear;the Yen is getting stronger against the Dollar. The Yen / Dollar exchange rate has a fluctuatingpattern with continuous lower tops; the currentstrengthening of the Yen since the last top in thechart is already taking place since mid 2007.
  • 5. Expected the oppositeThe domestic interest rates in Japan are aboutthe lowest in the world and not very attractive topark your money. Japan has an aging population and this willtemper the economic growth in Japan comparedto the more vibrant demographics in the U.S. forexample.Japanese public debt as a percentage of GDP isabout twice the size of the U.S. public debt. Andthe Japanese deficit does not look much better.
  • 6. Trade Cash FlowJapan has a trade surplus and is exporting morethan importing. This keeps the currency strong. The strengthening currency could lower exportsand increase imports in the long run. But in theshort term it reinforces itself for example byreducing the supply of Yen required for imports. Note that the U.S. is importing more than that it isexporting; remember the U.S. trade deficit? Thisweakens the U.S. currency.
  • 7. Investment Cash FlowThere seems to be a strong demand from non-Japanese investors for Japanese assets, especiallyshort-term money market instruments. The demand for assets outside Japan has definitelynot been very strong recently; just think about howthe stock markets around the world have behavedthe last six months.
  • 8. SummaryThus in summary, repeating what we said above: thecause for the strengthening of the Yen is that the Yenis a currency with net inflows; more Yen are boughtthen that there are Yen sold.The reason for this is thecombination of the strengthening trend itself, theJapanese trade surplus, the low return on investmentsin the rest of the world, the expected monetary policyin the U.S. and the diversification of foreign reservesin other countries away from the U.S. Dollar and Euro.In an historic perspective, the strengthening of the Yenis nothing new and not unexpected.
  • 9. Currency TheoryIn short, it is all about demand and supply. Whenthere is relatively more supply and less demand forYen’s, the Yen will weaken. When there is moredemand and less supply of Yen’s, the Yen willstrengthen.Thus a strengthening Yen means anincreasing demand for Yen’s compared to relativelyless supply (selling Yen’s and getting other currenciesin return).The strength of a currency is driven by tradeand current accounts. These are two sides of the samecoin.
  • 10. Referencehttp://www.stocktrendinvesting.com/blog/why-japanese-yen-so-stronghttp://www.reedconstructiondata.com/alex-carrick/post/why-is-the-value-of-the-japanese-yen-so-strong-interest-rates-and-the-carry/