Question

Uestion 1: why did the yen carry trade work during the early 2000s? why did it stop working after 2008? question 2: what drove an increase in the value of the yen between 2008 and 2011? question 3: why did the policy of the abe government to purchase government securities help drive down the value of the yen? what was the mechanism at work here? question 4: do you think the japanese government is engaging in currency manipulation? if so, what should other nations do about this? question 5: who in japan benefits from a devaluation of the yen? who does this hurt in japan? question 6: what does this case teach you about the way foreign exchange markets work?

Answer 1

1. During the early 2000s, businesses started borrowing in Japanese yen, where interest rates were almost zero, and investing in US treasury bills, which offered an interest of  almost 3 to 4  percent. As a result,  Japanese investors could make good money from the interest rate difference. After 2008, due to the global financial crisis, US interest rates came down and  the difference i interest  rates also declined. This caused the carry trade to stop working.
2. Following the fall of interest rates in the United States, Financial institutions had to sell dollar  denominated assets and buy back Japanese Yen to repay their loans. This caused an  increase in demand for the yen, and thereby a rise in the value of the yen.
3. Shinzo Abe's policy to purchase government securities help to expand the supply of money, there by reducing its value. Abe's government also agreed to a higher target of inflation. The  mechanism at work here was currency manipulation.
4. Yes, I think  the Japanese government is engaging in currency manipulation. Other nations should come together and have bilateral talks with the Japanese government. Peaceful means should be sought in order to  influence the Japanese government to avoid any kind of currency wars.
5. The japanese exporters, like the Toyota company benefit from a devaluation of the Yen. However, Japanese importers and those wishing to expand their business abroad are the ones who are hurt by the fall in the price of Yen, as this reduces their offshore purchasing  power .
6. Foreign  exchange markets are always susceptible to rises and falls in currency value. This may be due to disasters, financial crises or even government manipulation. Moreover, the case study also helps point out  that currencies, values, prices  and inflations of nations are interrelated. Changes in one  country's local market policies may affect  other  nations   too.