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Japanese Currency Yen Overview and Analysis

The Japanese yen is one of the most important currencies in the world. It is also one of the most popular currencies for trading. During the last ten years, the yen has seen several ups and downs, as the exchange rate to the US dollar has been ranging significantly. Various factors have affected the dynamic of the currency. For instance, shortly after the Great East Japan Earthquake in 2011, the exchange rate of yen to the US dollar reached its historical maximum since the second world war. The actions of the government have also played a crucial role in establishing the dynamics of yen. In 2013, the Bank of Japan launched the program to increase the money supply in order to switch to inflation from deflation. As a result, the yen has started to depreciate rapidly.

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Low inflation has been an acute issue for the Japanese government for a couple of past decades. For many years, Japan has been facing deflation which has been slowing down the economic growth of the country. It is not surprising that the government kept interest rates close to zero for the last 20 years. When compared to the US, Japan had much lower interest rates before the financial crisis in 2008. However, after 2008 the US government also maintained a zero interest rate for a long period.

Officially, Japan has a floating exchange rate, but it was already mentioned that the government used the exchange rate to increase inflation. The target inflation in Japan is around 2%, so the government tries to reach this level with the use of different instruments. There have also been speculations that Japan intentionally depreciates its national currency in order to boost foreign trade. Japan exports a lot of cars to the markets of the leading economies, like the US, Germany, and the United Kingdom. Taking into consideration that the automotive market is rather competitive, it is reasonable to assume that Japan might want to increase the competitive advantage of its cars. However, the government argued that the depreciation of yen is needed in order to enhance domestic demand. It is also noticeable that Japan is characterized by political stability, and the population is mainly confident in the government. However, in the last two years, Japan has been involved in the trade war with South Korea. The conflict was caused by the reluctance of some Japanese firms to pay reparations for the second world war. It seems that if this situation remains unresolved, there will be an impact of it on the Japanese currency.

During the coronavirus pandemic, the yen has strengthened against the US dollar. Many investors consider the yen to be a safe-haven currency. This might be due to the fact that people are sure in the actions of the government and that they believe Japan won’t face a significant economic downturn. It is rather hard to predict the dynamics of the yen exchange rate to the US dollar. It seems that the exchange rate will be substantially affected by Donald Trump’s health, his participation in the upcoming elections and the result of the elections. For a couple of last days, the US dollar has strengthened against the yen, following positive news about Donald Trump’s fight with the coronavirus. Right now, it might be not the best decision to buy the yen, as the market is volatile and unpredictable.

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