From the summer of 2015 to the summer of 2016, market forces raised the international value of the Japanese yen sharply.

From the summer of 2015 to the summer of 2016, market forces raised the international value of the Japanese yen sharply.

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December 6, 2021
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From the summer of 2015 to the summer of 2016, market forces raised the international value of the Japanese yen sharply. Why do you think the government of Japan was unhappy about this currency appreciation? If they wanted to stop the yen’s appreciation, what actions might the Bank of Japan (Japan’s central bank) have taken?

Answer and ExplanationSolution by a verified expert

Explanation
Appreciation of currency has the effect of making domestic exports costly and imports cheaper in the world market. As a result, appreciation of Country J's currency would make its exports uncompetitive and imports lucrative. Imports exceeding exports would widen the balance of payment deficits in Country J, which is why the government was not be happy about currency appreciation.

In order to prevent further appreciation, the central bank can undertake steps to expand the money supply such as purchase of securities, reducing the reserve requirements, quantitative easing. All these measures will pump more money into the economy, reduce the interest rates, which will drive foreign investments out of Country J to other countries where interest rates are higher. The capital flight will reduce the demand for Country J's currency, leading to the desired depreciation in its value against other currencies.

Verified Answer
Country J's currency appreciation would hurt its balance of payment by increasing deficits.

The central bank would take steps to increase the money supply, such as quantitative easing, open market operations, to reduce the interest rates, which would result in capital outflow and consequently, depreciate the currency.

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