The Japanese Yen has strengthened against the US dollar due to net capital inflows into Japan. This is driven by Japan's large trade surplus, low returns on investments elsewhere, expectations of low US interest rates, and diversification away from the dollar and euro. Historically, fluctuations in the Yen are normal and the long-term trend has been strengthening against the dollar. The strong Yen poses challenges for Japan's export-driven economy.

1. Why is the Japanese Yen
so strong? What is its
implications for an
export-driven economy
like Japan?
s1150027 Wararu Imaizumi

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/