The Yen´s Volatility and the Forex Market
The Yen with the Dollar and the Euro is one of the most important currency in terms of reserves of financial institutions, countries and volume traded in the forex market. Although the stock of international debt in the world nominated in yen has been falling since 1997, losing position on the dollar, and principally to the euro.
The Yen is the official currency of Japan, symbol isor JPY in the forex market. The exchange rate yen dollar (JPY/USD) was fixed between 1949 and 1971 with an exchange rate of 362 yen per dollar. From 1971 until today the rate has been 110 yen per US dollar.
After World War II, the Japanese economy had large trade surpluses, which led to an appreciation of the yen. For decades, Japan's economic policy aimed to increase national savings and credit to encourage investment. The Japanese economy had a strong and successful Japanese companies conquering international markets. But the liquidity available in the market for the yen encouraged financial speculation in the real estate market. The index of the Bombay Stock Exchange Nikkei reached a peak in 1989 and property prices were also at their highs at this time.
This situation is known as a speculative bubble. Although was not an explosion of the bubble during the 90s the drop in asset prices has been gradual but pronounced according the cumulative fall. Companies started to direct more foreign investment and domestic consumption fell down. The lower domestic demand led to a deflation.
The Bank of Japan, conducted a policy of extremely low interest rates (nominal interest rate of approximately zero) to combat the deflation. The poor growth associated with a very low interest rates led economists to classify this situation as a liquidity trap; situation in which the investment can not responds to the stimulus of the interest rate.
At the same time, the policy of low interest rates encouraged the operation of carry trade, which involves borrowing in yen and invest them in assets with higher yields than the rate of borrowing in yen. The carry trade pressured on the yen's further contribution to the bottom.The Economist magazine estimated in 2007 that the yen was 15% undervalued respect the dollar and 40% undervalued against the euro.
The Yen is the official currency of Japan, symbol isor JPY in the forex market. The exchange rate yen dollar (JPY/USD) was fixed between 1949 and 1971 with an exchange rate of 362 yen per dollar. From 1971 until today the rate has been 110 yen per US dollar.
After World War II, the Japanese economy had large trade surpluses, which led to an appreciation of the yen. For decades, Japan's economic policy aimed to increase national savings and credit to encourage investment. The Japanese economy had a strong and successful Japanese companies conquering international markets. But the liquidity available in the market for the yen encouraged financial speculation in the real estate market. The index of the Bombay Stock Exchange Nikkei reached a peak in 1989 and property prices were also at their highs at this time.
This situation is known as a speculative bubble. Although was not an explosion of the bubble during the 90s the drop in asset prices has been gradual but pronounced according the cumulative fall. Companies started to direct more foreign investment and domestic consumption fell down. The lower domestic demand led to a deflation.
The Bank of Japan, conducted a policy of extremely low interest rates (nominal interest rate of approximately zero) to combat the deflation. The poor growth associated with a very low interest rates led economists to classify this situation as a liquidity trap; situation in which the investment can not responds to the stimulus of the interest rate.
At the same time, the policy of low interest rates encouraged the operation of carry trade, which involves borrowing in yen and invest them in assets with higher yields than the rate of borrowing in yen. The carry trade pressured on the yen's further contribution to the bottom.The Economist magazine estimated in 2007 that the yen was 15% undervalued respect the dollar and 40% undervalued against the euro.
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