Yen Falls After Bank of Japan Maintains Ultra-Easy Policy

EconEye Admin

3 years ago

Last week, the yen hit a seven-month high against the U.S. dollar as many speculated that the Bank of Japan might follow other central banks by allowing rates to rise. But today the yen fell against the U.S. dollar after the Bank of Japan decided to maintain its ultra-easy monetary policy.—cnn.com

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

Why did the yen appreciate against the U.S. dollar last week?

The yen appreciated against the U.S. dollar last week because traders expected the Bank of Japan to ____________ interest rates, which was expected to ___________ the yen exchange rate.

a) lower; raise

b) raise; lower

c) lower; lower

d) raise; raise

Wrong! - If the Bank of Japan is expected to change interest rates, how does the expected yen exchange rate change? What actions do traders take in the foreign exchange market?

Well Done! - Traders expected the Bank of Japan to raise interest rates, which was expected to raise the yen exchange rate. When the yen exchange rate is expected to rise, the demand for yen increases, the supply of yen decreases, and the yen appreciates.

Why did the Japanese yen depreciate against the U.S. dollar when the Bank of Japan made no change to interest rates?

The Japanese yen depreciated because the demand for yen ____________ and the supply of yen ___________ as traders expected the yen to fall against the U.S. dollar.

a) increased; increased

b) decreased; increased

c) decreased; decreased

d) increased; decreased

Wrong! - When traders expect the yen to fall against the U.S. dollar, the profit that people expect to be made by holding yen decreases. Does the demand for yen increase or decrease? Does the supply of yen increase or decrease?

Correct! - When the yen is expected to decrease, the demand for yen decreases and the supply of yen increases, and the yen depreciates.

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