The Japanese yen has strengthened against the US dollar over the past 20 years. This is due to net capital inflows into Japan from its trade surplus, low returns on investments elsewhere, expectations of US monetary policy, and diversification away from the dollar and euro. While a stronger currency hurts exports, Japan's trade surplus currently reinforces yen strength. In the long run, a stronger yen could lower both exports and imports.

1. Why is the Japanese Yen so
strong? What is its
implications for an export-
driven economy like Japan?
s1150010 Kazuma Arimori

2. Contents
Abstract
Yen / Dollar Historic Trends
Expected the opposite
Trade Cash Flow
Investment Cash Flow
Summary
Currency Theory
Reference

3. Abstract
In summary, 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 overall trend during the last 20 years in clear;
the Yen is getting stronger against the Dollar.
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. 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.

6. 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.
Note that the U.S. is importing more than that it is
exporting; remember the U.S. trade deficit? This
weakens the U.S. currency.

7. Investment Cash Flow
There seems to be a strong demand from non-
Japanese investors for Japanese assets, especially
short-term money market instruments.
The demand for assets outside Japan has definitely
not been very strong recently; just think about how
the stock markets around the world have behaved
the last six months.

8. Summary
Thus in summary, repeating what we said above: 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.

9. Currency Theory
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.Thus a strengthening Yen means an
increasing demand for Yen’s compared to relatively
less supply (selling Yen’s and getting other currencies
in return).The strength of a currency is driven by trade
and current accounts. These are two sides of the same
coin.

10. Reference
http://www.stocktrendinvesting.com/blog/why-
japanese-yen-so-strong
http://www.reedconstructiondata.com/alex-
carrick/post/why-is-the-value-of-the-japanese-yen-
so-strong-interest-rates-and-the-carry/