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. 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. 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. ● 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. 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. 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. ● 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. 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. 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. 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/