1. Why is the Japanese Yen
so strong? What is its
implications for an export-
driven economy like Japan?
s1160231 Shuhei Yamashita
2. Summary
1. Back Ground
2. Abstract
3. Yen and Dollar Historic Trends (1) - (2)
4. Expected the opposite
5. Current Theory
6. Japan's Trade and Investment Cash Flow
7. Demand for Japanese Assets
3. 1. Back Ground
Why the Japanese Yen is so strong against the U.S Dollar now? Th
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 is our research and our conclusions on why
the Yen is so strong.
4. 2. Abstract
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.
5. 3. Yen and Dollar Historic Trends (1)
The over trend during the last 20 years in clear, the Yen is
getting stronger against the Dollar.
The Yen and 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.
6. 3. Yen and Dollar Historic Trends (2)
Thus 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. Thus, there are no big surprises here when
the Yen is continuing at this moment this trend.
The unusual period in the last 20 years was in the 1993 – 1996
period. The Yen was then relatively very very strong. I am
interested to hear explanations that cover that period.
7. 4. 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.
8. 5. Current Theory
1. 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.
2. 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.
9. 6. 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.
- 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.
10. 6. Japan's Trade and Investment Cash Flow
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.
11. 7. Demand for Japanese Assets
- Partly this could come from foreign reserves diversification.
Think about China for example who wants to be less
dependent on the U.S. Dollar or Euro.
- Other investors are seeking a temporary parking place for
their money when they sell their other assets. With the poor
performance of stock markets around the world, the very low
interest rate on U.S. treasury and the strengthening trend in
Yen, Yen money market instruments could look very
attractive.
12. 7. Demand for Japanese Assets
- There could also be a perception among market players
that the U.S. Federal Reserve may be more willing to conduct
aggressive monetary easing than the Bank of Japan. The
expectation that more new U.S. Dollars will be printed than
that there will be new Yen printed, will strengthen the Yen.
- The expectation for the differences in interest rate in
Japan and the U.S. will also have its influence on the
exchange rate. The Japanese interest rates have always been
the lowest. But when the expectation is that this difference
is will become less bigor when the U.S. is not expected to
increase interest rates for the foreseeable future, the carry
trade will slow down or unwind, strengthening the Yen
further.
