South-Western College Publishing - Economics  
Yen Down, Fears Up
Subject Foreign Exchange, Exchange Rate Determination
Topic International Finance
Key Words Exchange Rate Determination, Foreign Exchange, Exports, Devaluation
News Story The Japanese yen fell to a seven year low against the dollar. The yen broke the 140 level after the Japanese Central Bank failed to intervene in support of the declining yen. As a result of the drop in the yen, the currencies of Singapore, Indonesia, South Korea and Thailand also fell. The Taiwan dollar hit an 11-year low and the Australian dollar fell to a 12-year low.

Economic problems in Japan affect other Asian currencies in many ways. A rapid decline in the yen can cause investors to not only avoid Japan but also the entire economic region. There is also a competitive effect on the other currencies. Japan competes with many of the Asian countries in the export of goods such as electronics and steel. A devalued yen means that Japanese goods are cheaper than before in importing countries. A decline in exports from other Asian countries puts pressure on those currencies to also fall.

Rising unemployment and a banking system that has many problems plagues Japan. Some banks are near insolvency because of the many bad loans they have made. A recent decision by Nippon Life Insurance, one of Japanís largest life insurance companies, not to extend certain loans to these troubled banks, will no doubt further compound the banking systemís problems.

The fall in the yen could continue unless the Japanese government shows its resolve to fix the banking system. A resurgence of Japanís economy or renewed confidence on the part of foreign investors could also reverse the fall of the yen. Some analysts are predicting the yen to fall to 150 or 160. In 1995, the yen traded at 79 to the dollar.
(Updated June 16, 1998)

  1. In the foreign exchange market, what are some of the determinants of the demand for yen?

  2. What are some of the determinants of the supply of yen?

  3. What is the impact of a recession in Japan on the demand and supply of yen to the foreign exchange market?
Source Sandra Sugara, "Falling Yen Spurs New Asia Fears," The Washington Post, June 9, 1998.

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