Why is the Japanese Yen so strong?
What is its implications for an
export-driven economy like Japan?
Report on the current...
Introduction
● The Yen reached recently a 15-year high
against the Dollar. Was this in line with
expectations? What is hap...
Causation
● the cause for the strengthening of the Yen is
that the Yen is a currency with net inflows;
more Yen are bought...
● Yen / Dollar Historic Trends
○ The Yen / Dollar exchange rate has a fluctuating
pattern with continuous lower tops; the ...
Suffers
● Expected the opposite
○ The domestic interest rates in Japan are about the
lowest in the world and not very attr...
Problems
● Currency Theory
○ It is all about demand and supply. When there is relatively more
supply and less demand for Y...
● Demand for Japanese Assets
○ The same thing will happen when investments
outside Japan are expected to become more risky...
Countermeasure
● Due to demographics, the local demand will not
increase to bring the trade cash flow in balance.
Breaking...
Summary
● By Yen is a currency with net inflows, the
strengthening of the Yen causes.
● A strengthening of the Yen is only...
References
● Why is the Japanese Yen so Strong http://www.
stocktrendinvesting.com/blog/why-japanese-yen-so-strong
● Impli...
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Ele ex11 2

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Ele ex11 2

  1. 1. Why is the Japanese Yen so strong? What is its implications for an export-driven economy like Japan? Report on the current status of the currency and what it means? s1190124 Mitsunari Ishii
  2. 2. Introduction ● The Yen reached recently a 15-year high against the Dollar. Was this in line with expectations? What is happening and what is causing this? Here are the analysis and conclusions on why the Yen is so strong.
  3. 3. Causation ● the cause for the strengthening of the Yen is that the Yen is a currency with net inflows; more Yen are bought then that there are Yen sold. ○ 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.
  4. 4. ● Yen / Dollar Historic Trends ○ The Yen / Dollar exchange rate has a fluctuating pattern with continuous lower tops; the current strengthening of the Yen since the last top in the chart is already taking place since mid 2007.
  5. 5. Suffers ● 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.
  6. 6. Problems ● Currency Theory ○ 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 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.
  7. 7. ● Demand for Japanese Assets ○ The same thing will happen when investments outside Japan are expected to become more risky or providing lower returns. Before investors borrowed Yen at very cheap interest rates, used it to invest in other countries where the returns were higher. Now there could be some unwinding or less carry trade (paying back the loans in Japan and needing more Yen for that or exchanging less Yen than before).
  8. 8. Countermeasure ● Due to demographics, the local demand will not increase to bring the trade cash flow in balance. Breaking the circle, weaken the currency and getting an outflow of money can only happen by declining exports (this is not good for the Japanese companies and stock market), and by assets outside Japan being more attractive investment opportunities than the ones in Japan. Thus a much faster improvement of the economy in the rest of the world then in Japan is Japan’ s only hope.
  9. 9. Summary ● By Yen is a currency with net inflows, the strengthening of the Yen causes. ● A strengthening of the Yen is only having a very negative effect in Japan. ● In overseas markets, the price competitiveness is lose.
  10. 10. References ● Why is the Japanese Yen so Strong http://www. stocktrendinvesting.com/blog/why-japanese-yen-so-strong ● Implications Of Strong Yen On World Wide Foreign Exchange Market http://www.prweb. com/releases/2011/10/prweb8899591.htm ● The Big Core versus The Big Apple http://www.reedconstructiondata.com/market-intelligence/alex-carrick/

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