Yen’s Decline vs U.S. Dollar Rapid

EconEye Admin

3 years ago

The yen’s depreciation against the dollar reflects Japan’s widening interest rate gap with the United States. Japan intervened last year to stop the yen’s fall but has since refrained from further action. Vice finance minister, Masato Kanda says stepping into the foreign exchange market again has not been ruled out.—kyodonews.net

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

Why does Japan’s “widening interest rate gap with the United States” result in the “yen’s depreciation against the dollar”?

As Japan’s interest rate differential becomes more negative, the demand for yen __________, the supply of yen ___________, and the yen depreciates.

a) decreases; doesn’t change

b) decreases; decreases by less than demand decreases

c) decreases; increases

d) increases; increases by more than demand increases

Wrong! - As Japan’s interest rate differential becomes more negative, how does the demand for Japan’s assets change? How does this influence the demand for yen? Does the number of people who want to keep their funds in yen change? How does this influence the supply of yen?

Well Done! - As Japan’s interest rate differential becomes more negative, the demand for Japan’s assets decreases and the demand for yen decreases. Fewer people want to keep their funds in yen and the supply of yen increases. When the demand for yen decreases and the supply of yen increases, the yen depreciates.

How could the Bank of Japan intervene in the foreign exchange market to “stop the yen’s fall” against the U.S. dollar?

The Bank of Japan could _____________.

a) buy yen and decrease its foreign currency reserves of U.S. dollars

b) sell yen and decrease its foreign currency reserves of U.S. dollars

c) sell yen and increase its foreign currency reserves of U.S. dollars

d) buy yen and increase its foreign currency reserves of U.S. dollars

Wrong! - Does the Bank of Japan sell yen or buy yen if it wants the yen exchange rate to rise against the U.S. dollar? If it buys yen, how are they paid for?

Good Job! - When the Bank of Japan buys yen, it pays for them by using its foreign currency reserves of U.S. dollars. The demand for yen increases and the yen exchange rate rises against the U.S. dollar.

Share this: