Bank of Japan Maintains Ultra-Low Rates

EconEye Admin

4 years ago

The Bank of Japan is maintaining its -0.1% interest rate target, while European central banks and the U.S. Federal Reserve are raising interest rates. Growing monetary policy divergence between Japan and the rest of the world has pushed the yen to 24-year lows.—cnbc.com

Answer the following questions to check your understanding of the story.

With the Japanese yen at a 24-year low, what can we say about the U.S. dollar?

The U.S. dollar is ______________.

a) at a 24-year low against the yen

b) at a 24-year high against all other currencies

c) at a 24-year high against the yen

d) depreciating against the yen

Wrong! - What is the relationship between the U.S. dollar exchange rate in terms of the Japanese yen and the Japanese yen exchange rate in terms of the U.S. dollar?

Good Job! - The U.S. dollar exchange rate in terms of the Japanese yen is the inverse of the Japanese yen exchange rate in terms of the U.S. dollar. When the Japanese yen is at a 24-year low against the U.S. dollar, the U.S. dollar is at a 24-year high against the Japanese yen.

How does the change in the Japanese interest rate differential influence the demand for Japanese yen and the supply of Japanese yen?

The demand for Japanese yen ______________, and the supply of Japanese yen ______________.

a) increases; decreases

b) increases; increases

c) decreases; decreases

d) decreases; increases

Wrong! - When the Japanese interest rate differential decreases, the smaller is the demand for Japanese assets. Does the demand for Japanese yen increase or decrease? Does the supply of Japanese yen increase or decrease?

Well Done! - When the Japanese interest rate differential decreases, the demand for Japanese assets decreases, so the smaller is the demand for Japanese yen and the greater is the supply of Japanese yen. The Japanese yen depreciates.

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