Why is the Japanese Yen sostrong? What is its implications for an export-driven economy like Japan? s1170187 Daichi Kikuta
Introduction● The Yen reached recently a 15 year high against the Dollar.● the cause for the strengthening of the Yen is that the Yen is a currency with net inflows.
why?● The reason for this is the combination of the strengthening trend itself, the Japanese trade surplus, the low return on investments in the rest of the world.● The expected monetary policy in the U.S. and the diversification of foreign reserves in other countries away from the U.S. Dollar and Euro.● In an historic perspective, the strengthening of the Yen is nothing new and not unexpected.
Yen and Dollar Historic Trends● The Yen is getting stronger against the Dollar.● A strengthening of the Yen is something that fits well with the historic perspective of both the last 20 years as well as the last 3 years.● There are no big surprises here when the Yen is continuing at this moment this trend.
Expected the opposite● The domestic interest rates in Japan are about the lowest in the world and not very attractive to park your money.● Japan has an aging population and this will temper the economic growth in Japan compared to the more vibrant demographics in the U.S. for example.● Japanese public debt as a percentage of GDP is about twice the size of the U.S. public debt. And the Japanese deficit does not look much better.
Currency Theory● 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.
Japan’s Trade and Investment Cash Flow● Trade Cash Flow. Japan has a trade surplus and is exporting more than importing. This keeps the currency strong.● Investment Cash Flow. There seems to be a strong demand from non-Japanese investors for Japanese assets, especially short-term money market instruments.
Summaryrepeating what we said above: the causefor the strengthening of the Yen is thatthe Yen is a currency with net inflows;more Yen are bought then that there are Yen sold.