The Rise and Fall of Japanese Yen

The Rise and Fall of Japanese Yen (2000-2008)

The American dollar had been extremely high, during the early 2000‘s due to an increase in production of labour in comparison to the rest of the world. And so as a result of this economic growth, investors in the US were able to search elsewhere exploiting the high dollar and benefiting substantially from exchange rates.

The yen carry trade worked to benefit both parties due to the weakened state of Japan's economy and was attempting to strengthen its economy by reducing interest rates to well below 5%, if there was any interest rate at all. This meant US investors could borrow more money and repayments would be less than it would be in the US, thus a constant flow of US investors look to Japan for loans and so benefiting the economy from the constant increase in available funds. Both Japan and America benefit as a closer relationship was formed by importers and exporters.

As a result of the American federal reserve's response to the global financial crisis, which was to quickly invest liquid assets into affected markets and as a result lowering interest rates. Interest and exchange rates dropped to near match those seen in Japan, thus carry trade was no longer profitable. This impacted significantly on American investors in Japanese loans and business transactions as repayments and cost began to increase due to the exchange rate. 2008 saw all US investors frantically make repayments to all loans and debts, attempting to pay off such debts while the USD was still of value. US importers discontinued trade with Japanese business as it was becoming too expensive to continue trade and moved to cheaper alternatives for imports, to countries such as China and Thailand.

And so Japan had negative downturns in regards to exporting and trade but overall experienced rise in its economy due to the increased value of yen in comparison to the previously dominant US dollar

Increase in the value of the Yen (2008-2011)

The strong yen growth during the period of 2008 to 2011 was mainly due the Global Financial Crisis triggering responses which led to the yen being strong for these 4 years.

When the GFC hit in 2008, the United States Federal Reserve countered by releasing liquidity to the markets which were most affected. When this occurred the interest rates on US Treasury Notes dropped creating an interest rate differential between Japanese and US assets narrowed and the carry trade agreement became futile. Financial Institutions began to unwind their positions and trading their dollar-denominated assets and purchasing yen to pay back their original loans. The increase in demand of the yen was due to this situation which significantly increased the value of the yen.

Currency Manipulation

There has been much debate regarding whether or not the Japanese government is engaged in currency manipulation or not.

Some would say this is true because of a number of factors. The Yen’s rise had little to do with economic strength with little evidence from the Japanese government. The G-5 Agreement, or Plaza Accord, was jointly concluded by five major industrial countries: France, West Germany, Japan, the United States and the United Kingdom to depreciate the USD against the Japanese Yen and German Deutsche Mark by intervening in currency markets. Devaluing the dollar made US exports cheaper to purchase for its trading partners, which in turn allegedly meant buying more American-made goods and services from other countries (Hill et al. 2015). The Plaza Accord signing was significant because it reflected the emergence of Japan as a real player in managing the international monetary system.

The recessionary effects of the reinforced yen in the export-dependent economy of Japan, however, created an incentive for expansionary policies that led to the late 1980s Japanese asset price bubble, which advanced into Japan’s prolonged period of deflation and low growth. This was violated when Japan started interventions that had little effect on the bank; selling dollars at Y240 and now buying them back at less than Y170. Japan’s monetary operations focused on the outstanding balance of commercial banks’ current accounts, with a target increase from 1 to 5 trillion yen, which later increased to 35 trillion yen between March 2001 and December 2004 (Hawkes, 2011).

Japanese quantitative easing was intended to stimulate new long-term investments with a large plan of long-term government bonds and purchases from Japan. This showed no intensive fluctuation of the yen/dollar price. Exports increased from 4 trillion to 7.6 trillion. The second monetary easing period was comprehensive, used major government, as well as business papers and corporate bonds. To end very low inflation in Japan, Yen’s third and most recent period of quantitative easing addresses market weakness and stagnant growth. This resulted in a positive impact on export-oriented business periods (Andolfatto, Li, 2014).

All of these factors suggest that the Japanese government did use currency manipulation, in which other nations should intervene and bring this case forward where justice shall be served. However, the factors illustrated in the diagram below suggest that the Japanese government has not engaged in currency manipulation.

Because of the elaborate measures taken by the Japanese government to assist in the stabilisation of the Yen, it can be concluded that the Japanese government has not engaged in currency manipulation. 

Devaluation of Yen

This Case study provides the benefit from Japanese yen in terms of appreciation and devaluation, moreover the benefit from Japanese companies such as Toyota. To begin with, the devaluation of Japanese yen benefits for Japan’s exporters, the investment and employee wages in export-related, and oversea tourism. According to Anthony (2016) , the advantages of a more fragile yen incorporate higher benefits for exporters, given that North America represents around a fourth of Japanese recorded organizations. And other benefits of falling more noteworthy speculation and higher wages in fare related divisions alongside rising stock costs, while the imported swelling from a less expensive cash likewise supports endeavours to battle flattening, especially in the wake of modest oil costs. Furthermore, Japanese local tourism still obtain more spending from oversea travelling. It was reported that there had been “a 27 percent expansion in outsiders visiting Japan in 2014, exploiting the debilitated yen”(Charles, Thomas & Rumintha 2016). As a result, a number of different fields obtain benefits from devaluation of the yen. However, US treasury have profits in appreciation in the value of the yen. It is reported that this financial strategy included getting in Japanese yen, where financing costs were near zero, and contributing the credits in higher yielding resources, normally US Treasury bills, which conveyed loan fees of 3 to 4 percent. Financial specialists made benefits from the loan fee differential. At its top, money related establishments had more than a trillion dollars of resources into the convey exchange (Charles, Thomas & Rumintha 2016). Finally, Toyota obtained benefit from the fall of the yen. Peter's (2017) report showed that in the three months ending September 30, Toyota announced a 17.1% year-on-year increase in net profit to 481.2 billion yen, with trading prices rising by 9.9% to 6.66 trillion yen. Working benefit was ￥?522.2bn, up 10 percent from a year prior. Therefore, Toyota has enjoyed a boost from the falling yen and upgraded their profit accordingly. The appreciation of the yen undermines the strength of Japanese value and reduces the estimation of overseas earnings when interpreting the yen. Charles, Thomas and Rumintha (2016) analysed in February 2012, and Toyota said its annual profit as of March 31, 2012 was about 200 billion yen, down 51% from last year. Toyota accounts for almost 50% of the cars it sells in Japanese factories, so the rise is particularly severe in yen estimates.

Overall, the devaluation of Japanese yen made a number of Japan’s exporting companies development better than before such as Toyota, however, the rising of yen was not of benefit.