Currency Exchange Rates

Yen Exchange Rate

Yen Exchange Rate - Economic And Business Factors That Affect The Japanese Currency

Yen Exchange Rate

The Japenese currency is one of the most widely held reserves and traded currencies in the world. Next to the US dollar, the Euro and the Pound sterling, it is heavily used to facilitate trade and commerce. Many economic commentators consider the Japanese Yen to be heavily undervalued relative to other benchmark currencies. The artificial low interest rates and low inflation rates experienced by Japan has prompted some to consider that the Yen should be prompted to rise relative to the US dollar. This has been a sore point with US car makers who argue that the Japanese Yen exchange rate makes Japanese cars comparatively cheaper thereby providing a comparative advantage to Japanese car makers. There is a division of opinion whether or not the Japanese economy is as weak as some perceive it to be.

Policy makers in Japan have held rates low to facilitate exports and to combat what is sometimes perceived as a fragile economy. Since Japan has a large current account surplus, some policy makers argue that this should be more favorably reflected in the Japanese Yen exchange rate. The low interest rates have been viewed by some as an artificial way to hold down the value of Japanese currency exchange. This low interest rate policy has produced what is referred to as the 'carry trade'. The basic premise is that investors borrow Yen at very low interest rates and purchase high yielding assets such as US or Australian bonds, stocks or emerging market debt that offers superior interest margin. This practice, which is widely perceived as the propensity of the market to take on risk weakens the Japanese currency because investors are required to sell the borrowed Yen to convert the funds into other currencies.

Yen Exchange Rate

The Japanese currency is also affected by the same market forces and measure of business conditions that affect other economies and currency exchange rates, namely: relative growth, the inflation differential, current account deficit/surplus, interest rate differentials, equity flows, and labor and employment. Favorable business conditions can also dramatically affect the demand for an exchange rate. These economic and business factors influence the value of one currency against another. The recent plight affecting the US markets and structural weaknesses have contributed to the fall in the US dollar relative to other currencies. All things being equal, this produces greater purchasing power for countries, including Japan.

In recent times, the Japanese currency has also been affected by the unwinding of the carry trade which can cause swings in the value of the Japanese exchange rate.

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