Why is the Japanese Yen sostrong? What is its implications for an export-driven economy like Japan? S1170153 Noritaka Shimizu
Yen / Doller Historic Trends The overall trend during the last 20 years in clear; the Yen is getting stronger against the Dollar. The Yen / Dollar exchange rate has afluctuating pattern with continuous lower tops; thecurrent strengthening of the Yen since the last top in the chart is already taking place since mid 2007.
Expected the opposite The domestic interest rates in Japan are aboutthe lowest in the world and not very attractive to park your money. Japan has an aging population and this willtemper the economic growth in Japan comparedto the more vibrant demographics in the U.S. for example.
Expected the oppositeJapanese public debt as a percentage of GDP isabout twice the size of the U.S. public debt. And the Japanese deficit does not look much better.
Currency TheoryExports 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.
Demand for Japanese Assets Other investors are seeking a temporary parking place for their money when they sell their other assets. With the poor performance of stock markets around the world, the very low interest rate on U.S. treasury and the strengthening trendin Yen, Yen money market instruments could look very attractive.
Demand for Japanese AssetsThe expectation for the differences in interest rate in Japan and the U.S. will also have its influence on the exchange rate. The Japanese interest rates have always been the lowest.But when the expectation is that this difference iswill become less big (e.g. dropping U.S. treasury rates) or when the U.S. is not expected toincrease interest rates for the foreseeable future, the carry trade will slow down or unwind, strengthening the Yen further.
SummaryThus in summary, repeating what we said above:the cause for the strengthening of the Yen is thatthe Yen is a currency with net inflows; more Yen are bought then that there are Yen sold.
Summary The reason for this is the combination of the strengthening trend itself, the Japanese tradesurplus, the low return on investments in the restof the world, the expected monetary policy in theU.S. and the diversification of foreign reserves in other countries away from the U.S. Dollar andEuro. In an historic perspective, the strengthening of the Yen is nothing new and not unexpected.