The Rise and fall of the Japanese Yen

Some of the competitors of Japan in matters regarding the economy include China, Russia, the United States of America, and several other big names. However, the United States is the major talking point of this analysis, from a competitor point of view. In the early 2000s, the Japanese Yen was weaker than the United States dollar. This was mainly caused by the carry trade, which involved people borrowing loans in the form of Japanese Yen when the interests were zero. Such loans would then be invested in the American treasury bills, which yielded a high amount of money. Buying back the Yen in large numbers and by many investors made it impossible to stop the rise in the value of the Japanese currency because people just had to be allowed to pay back the loans (Barroso & Santa-Clara, 2015).

A further damage to the efforts to try and regulate the situation occurred when the financial crisis began. Many investors saw Japan as the safe place to store their cash because it had its currency rise in value significantly. The safe cash parking status of money only made it worse for Japan because the banks would not reject business and at the same time the importation activities were still going on despite the importers feeling the pinch of the rise in the value of the Japanese Yen. As more people kept depositing cash in the Japanese banks, the more they got to a point of no return on matters concerning the speedy rise in the value of the country’s currency. The Abe Government Policy, Currency Manipulation and the Effects of Devaluing the Yen During his campaigns, Abe was very emphatic on the idea that he was planning to take measures that would weaken the Yen if he ascended to power, which he eventually did.

Slightly before Abe became the prime minister the Japanese government had made a move to expand the money supply by buying government securities. This move was made to ensure that there is a lot of money supply in the public so as to cause inflation. The purchase of securities was executed in an effort to acquire a higher inflation that would eventually the Japanese Yen weaken. The Japanese government intervened in the foreign exchange markets by selling the Yen for dollars. When Japan subsidized the costs in the industries that deal in export goods, the resulting effect was that the employees’ wages were increased. This increased. Consequently, there was inflation in the country, a situation that the financial advisers of Abe knew would occur. This helped reduce the value of the Yen significantly.

These are economic moves caused the money supply in the Japanese economy to increase thus the demand for commodities by consumers also that under normal circumstances would not be advisable but because Japan had its currency’s value rising so significantly, such measures were necessary to stabilize the country’s currency. Santa-Clara, P. Beyond the carry trade: Optimal currency portfolios.  Journal of Financial and Quantitative Analysis, 50(5), 1037-1056. Bénétrix, A. S. Koibuchi, S. Sato, K. Shimizu, J.  Managing Currency Risk: How Japanese Firms Choose Invoicing Currency. Edward Elgar Publishing.