Why is the Japanese Yen sostrong? What is its implications for an export-driven economy like Japan? ID: s1160140
Japanese Yen● The yen should now be trading for between 76 and 83 yen to the doller.● The situation that relative value of yen as Japanese money is higher than a level in international markets.
Yen / Doller History and Trends● The overall duaring the last 20-years in clear. Then, The yen become stronger against the doller.● The yen and doller exchange rate has a fluctuating pattern with continuous lower tops.
Why is the Yen Strong?● The strength of a currency is driven by trade and current accounts. These are two sides of the same coin.(The trade cash flow and The investment cash flow)● In short, it is all about demand and supply. When there is relatively more supply and less demand for Yen’s, the Yen will weaken. When there is more demand and less supply of Yen’s, the Yen will strengthen.
The Trade Cash Flow.● Exports from Japan cause demand for Yen to buy the Japanese goods.● Imports into Japan create supply of Yen to buy other currencies to pay for the imports.
The Investment Cash Flow.● Investments from outside Japan in Japanese assets cause demand for the Yen. If these assets are more in demand, the price goes up and the Yen becomes even stronger.● Investments from Japanese investors outside Japan create supply and thus a weakening factor for the Yen. When there is less demand for these assets the price in Yen goes down and the Yen would strengthen.
Japan’s Trade Cash Flow● Japan has a trade surplus and is exporting more than importing. This keeps the currency strong.● The strengthening currency could lower exports and increase imports in the long run. But in the short term it reinforces itself for example by reducing the supply of Yen required for imports.
Japan’s Investment Cash Flow● The demand for assets outside Japan has definitely not been very strong recently.
Summary● Cause for the strengthening of the yen is that the yen is a currency with net inflows.
Japans Strong Yen Problem● Economists are quick to point out that a weak dollar doesnt necessarily mean a strong yen.● Japanese consumers are faced with a mixed bag. The slight appreciation of the currency helps in capping the rising cost of food and fuel, which have both become concerns due to price inflation.