The fate of Japanese economy is often tied to the strength or the weakness of the

yen. Historically, the Japanese yen reached an all time high of 306,84 in December
of 1975 and a record low of 75,74 in October of 2011.
When the value of yen is high (around 75 to 95 yen per dollar), Japanese goods
become more expensive overseas and less people buy them, and foreign goods
become cheaper in Japan and people buy these goods instead of Japanese products.
These forces bring the trade surplus down and cause the value of the yen to
decrease.
When the value of yen is low (around 105 to 140 yen per dollar), Japanese goods
become cheaper overseas and more people buy them. Also, foreign goods become
more expensive in Japan and more people buy Japanese goods instead of foreign
products. These forces increase the trade surplus and cause the value of the yen to
rise.
Undervalued yen
By 1971 the yen had become undervalued. Japanese exports were costing too little
in international markets, and imports from abroad were costing the Japanese too
much. This undervaluation was reflected in the current account balance, which had
risen from the deficits of the early 1960s to a then-large surplus of US$5.8 billion in
1971. The belief that the yen, and several other major currencies, were undervalued
motivated the United States' actions in 1971.
Yen and major currencies float
Following the United States' measures to devalue the dollar in the summer of 1971,
the Japanese government agreed to a new, fixed exchange rate as part of
the Smithsonian Agreement, signed at the end of the year. This agreement set the
exchange rate at 308 per US$1. However, the new fixed rates of the Smithsonian
Agreement were difficult to maintain in the face of supply and demand pressures in
the foreign-exchange market. In early 1973, the rates were abandoned, and the
major nations of the world allowed their currencies to float.
Japanese government intervention in the currency market
In the 1970s, Japanese government and business people were very concerned that
a rise in the value of the yen would hurt export growth by making Japanese
products less competitive and would damage the industrial base. The government
therefore continued to intervene heavily in foreign-exchange marketing (buying or
selling dollars), even after the 1973 decision to allow the yen to float.
Despite intervention, market pressures caused the yen to continue climbing in
value, peaking temporarily at an average of 271 per US$1 in 1973 before the
impact of the 1973 oil crisis was felt. The increased costs of imported oil caused the
yen to depreciate to a range of 290 to 300 between 1974 and 1976. The reemergence of trade surpluses drove the yen back up to 211 in 1978. This currency
strengthening was again reversed by the second oil shock in 1979, with the yen
dropping to 227 by 1980.

In the mid 1970s when the dollar was worth 240 yen, American tourists could travel
cheaply in Japan and Japanese products were cheap.
Yen in the early 1980s
During the first half of the 1980s, the yen failed to rise in value even though current
account surpluses returned and grew quickly. From 221 in 1981, the average value
of the yen actually dropped to 239 in 1985. The rise in the current account surplus
generated stronger demand for yen in foreign-exchange markets, but this traderelated demand for yen was offset by other factors. A wide differential in interest
rates, with United States interest rates much higher than those in Japan, and the
continuing moves to deregulate the international flow of capital, led to a large net
outflow of capital from Japan. This capital flow increased the supply of yen in
foreign-exchange markets, as Japanese investors changed their yen for other
currencies (mainly dollars) to invest overseas. This kept the yen weak relative to the
dollar and fostered the rapid rise in the Japanese trade surplus that took place in the
1980s.
Effect of the Plaza Accord
In 1985 a dramatic change began. Finance officials from major nations signed an
agreement (the Plaza Accord) affirming that the dollar was overvalued (and,
therefore, the yen undervalued). This agreement, and shifting supply and demand
pressures in the markets, led to a rapid rise in the value of the yen. From its
average of 239 per US$1 in 1985, the yen rose to a peak of 128 in 1988, virtually
doubling its value relative to the dollar. After declining somewhat in 1989 and 1990,
it reached a new high of 123 to US$1 in December 1992. In April 1995, the yen hit
a peak of under 80 yen per dollar, temporarily making Japan's economy nearly the
size of the US.[19]
In the late 1980s and early 1990s when the dollar was worth 80 yen, the cost of
living for Americans in Japan was almost catastrophically high but American
companies were able to make inroads in the Japanese economy because American
products were cheap in Japan.
Post-bubble years
The yen declined during the Japanese asset price bubble and continued to do so
afterwards during the lost Decade.
However, the Asian financial crisis of 1997 had a significant effect on Japanese
economy. Asian countries usually run a trade deficit with Japan because the latter's
economy was more than twice the size of the rest of Asia together; about 40% of
Japan's exports go to Asia. The Japanese yen fell to 147 as mass selling began, but
Japan was the world's largest holder of currency reserves at the time, so it was
easily defended, and quickly bounced back.
In the early and mid 2000s, foreign investors took advantage of Japan's low interest
rates and took out yen loans for next to nothing and used that money to invest in
other currencies, stocks or other investments globally, reaping profits with little cost
and in the process generating investments in Japanese stocks and driving down the
value of the yen.

The yen declined, reaching a low of 134 to US$1 in February 2002. The Bank of
Japan's policy of zero interest rates has discouraged yen investments, with the carry
trade of investors borrowing yen and investing in better-paying currencies (thus
further pushing down the yen) estimated to be as large as $1 trillion. In February
2007 The Economist estimated that the yen was 15% undervalued against the
dollar, and as much as 40% undervalued against the euro.
The tactic, known as the yen carry trade, emerged in the early 2000s when the
Bank of Japan continued keep interest rates low while other banks, beginning in
earnest in 2004, started to raise rates, creating incentives to borrow money in Japan
and invest it in other countries where returns were higher. Much of the trade was
carried out by hedge funds.
No one knows the size of the yen carry trade but some in 2008 estimated it be
worth at least $200 billion. Some said it was as high as $1 trillion. The credit bubble
caused by sharp depreciation of the yen raised concerns of the destabilization of
world financial markets if the bubble burst in an untimely way.
The yen carry trade lost its appeal in 2007 when the value of the yen shot up
against the dollar and worries began over the fallout of the subprime mortgage
crisis. One analyst told the New York Times, If you're investing overseas and the
yen starts to go against you, or what you're investing in goes against you, then you
start to sell that and maybe the yen gets strong---that panics people into covering."
Most economists were happy to see the yen carry trade curtailed as it encouraged
speculators and created instability.
After the global economic crisis of 2008
However, this trend of depreciation reversed after the global economic crisis of
2008. Other major currencies except the Swiss franc have been declining relative to
the yen. The yen continued to strengthen, falling below 85 to the dollar in August
2010 to 84.72, and reaching a 15-year low in September, falling below 83 to
82.87. The strong yen continued to be seen as primarily a negative thing and there
were calls for the Bank of Japan and the government to do something to reverse the
trend.
Conventional thinking had always been that the value of a currency rises when the
a country's economy is strong and declines when the economy is weak. So why has
the yen appreciated when Japan's economy has been far for robust. Osaka
University professor Yoshiyasu Ono, an advisor to Prime Minister Naoto Kan, thinks
this has occurred as result of improved productivity by Japanese economies.
Junuchi Maruyama wrote in the Yomiuri Shimbun , When the nation's exports slow
due to a rise in the yen, firms try to improve productivity by cutting production costs
and improving competitiveness in the global market. As a result exports do not
decline significantly. Instead, imports fall as domestic companies cut jobs to
streamline business...The drop in imports is due to a decline in domestic demand.
When imports is due to a decline in domestic demand. When imports decline while
exports do not, the nations current account surplus will grow, prompting further
appreciation of the yen."

One believes a vicious cycle occurs, with the yen's rise causing layoffs that prompt
domestic demand to fall, bringing about a further appreciation of yen. Conversely,
improving the job market and boosting domestic demand will efficiently break this
cycle and stem the rise in the yen. The high value of the yen also has its roots in the
economic probes in the United States and he. Major investors consider the yen to be
a safer investment than the dollar or the euro.
Even though Japan's economy is no great shakes," Maruyama wrote, investors
purchase the yen cause they believe Japan's currency does not violently fluctuate
and its exchange risks are easy to manage compared with the those of the
greenback and euro, whose value may suddenly plunge at any time."
Value of Yen Rises After the Earthquake and Tsunami
When the Japanese economy was hit by the powerful earthquake and a nuclear
power plant accident in Fukushima Prefecture in March 2011, the yen rose to a
postwar record-high of 76.25 yen against the U.S. dollar. In May 2011 the value of
the yen rose again to the 80 to the dollar, reaching 79.57 the rise was mainly due
to concerns about the U.S. economy. It also dipped below the 80 mark in June.
Why was the yen bought up in a time of crisis like? You would think people would be
more likely to buy other currencies. According to Kyodo News: The yen was bought
on the back of growing anxiety... Fears over the nuclear power plant accident led to
a stock plunge in Japan, pulling down share prices overseas as well. Investors who
try to avoid investing in risky assets such as stocks and currencies of emerging
economies are fleeing their funds to the Japanese currency, which is considered
safe. Speculators have capitalized on such moves, lifting the currency by nearly 5
yen against the dollar." [Source: Kyodo News, March 17, 2011]
Why was the yen considered ''safe'' even after the earthquake and tsunami in
2011? According to Kyodo News: The Japanese economy has been suffering from
low growth and prolonged deflation since the collapse of the bubble economy in the
early 1990s, prompting the Bank of Japan to introduce the monetary easing policy
to keep interest rates lower than levels in other countries. Under such
circumstances, while it is unlikely the economy will see robust growth, there is little
risk of the economy collapsing or the yen falling sharply. In addition, Japan
maintains a current account surplus with abundant external assets, making
investors feel comfortable buying the yen whenever anxiety grows in the market.
Isn't it strange that the yen is being bought when the Japanese economy itself is a
source of concern now? It appears to be a strange phenomenon, but the yen's
''myth of security'' remains persistent, leading yen buying to surpass selling
pressure stemming from prospects of deterioration in the Japanese economy. The
yen was also bought on speculation that Japanese companies would repatriate
overseas assets and convert them into yen to cover disaster-related costs. [Ibid]
How did hedge funds and other speculative funds move? There is a view that they
have launched yen buying by capitalizing on speculation that Japanese insurers are
repatriating overseas assets to prepare for massive payments of insurance claims
resulting from the quake. But insurers have denied that they have sold assets

denominated in foreign currencies on a large scale to secure yen funds for

insurance payments. [Ibid]
Is the strength of the yen likely to continue? There are many market participants
who believe the yen will face buying pressure while the prospects of disaster
reconstruction and nuclear power plant troubles remain unclear. But other
participants point out that money will be invested in higher-yielding currencies as
emerging nations continue to see high growth, reducing the yen's value. Some say
overseas investors could start engaging in ''Japan selling'' and bring down the yen if
the nuclear power-related troubles deepen further.
Foreign exchanges holding are a measure of economic links with other countries
and a manifestation of imports and exports, investment and speculative hot
money flowing into local markets.
Politics (2012)
The recent trend of the weakening Japanese yen reflects a major policy shift in
Japan, following the formation of the government of prime minister Shinzo Abe. A
Big Political Change from Democratic Party (DPJ) to Liberal Democratic Party(LDP) in
the General Election on 16th December 2012, since 2009, had Japanese Yen Value
returned back to more reasonable position. A big political change in December 2012
moved the over-estimated Japanese Yen value to a reasonable value(1Euro=105
JPY140 JPY). It is certain that the world competitiveness of Japanese Industries is
increased.
Abe made the war on both deflation and the strengthening yen central objectives of
his candidacy. Along these lines, he has called for very aggressive and potentially
unlimited monetary easing policies by the Bank of Japan (BOJ) to weaken the yen.
Most of all, he has stressed his intention to hold the BOJ accountable to these goals,
threatening to remove the central banks independence if it fails to act.
On April 4, 2013 the Bank of Japan announced that they would expand their Asset
Purchase Program by $1.4 trillion in two years. The Bank of Japan hopes to bring
Japan from deflation to inflation, aiming for 2% inflation. The amount of purchases is
so large that it is expected to double the money supply. But this move has sparked
concerns that the authorities in Japan deliberately devalue yen in order to boost
exports.[22] However, the commercial sector in Japan worried that the devaluation
would trigger an increase in import prices, especially in energy and raw materials.
On May 9, 2013, the currency weakened to 100 yen for every US dollar for the first
time since April 2009.
2015 August - Japan restarts first nuclear reactor at Sendai plant, under new safety
rules following 2011 Fukushima disaster.
2016 April - At least 44 people die and more than 1,000 are injured as a result of
two major earthquakes on the southern island of Kyushu.
Forecasts
30 May - USD / JPY is 111.11

The yen will outshine the dollar as next years star performer in the $5.3 trillion-aday global currency market, according to Morgan Stanley.
In what it calls an "out-of-consensus" prediction, the bank said it expects Japans
currency to strengthen to 115 against the greenback at the end of 2016. That
contrasts with a median forecast for the yen to weaken 126 per dollar, according to
analysts surveyed by Bloomberg.
Morgan Stanleys top trading recommendations for next year include buying the yen
against the British pound, Swiss franc, South Korean won and offshore Chinese
yuan, according to a Nov. 29 report.
"The yen is the most undervalued of the group-of-10 currencies and is also at an
extreme from a historical point of view," said Ian Stannard, head of European
foreign exchange strategy at Morgan Stanley in London. "The yen is likely to
perform much better than the market consensus," said Stannard, whose bank was
among the top forecasters of foreign-exchange rates last quarter, according to
Bloomberg rankings of 61 firms. The currency will also be supported in the longer
term as Japanese pension funds repatriate money, Stannard said.
The yen has fallen more than 20 percent against the dollar since April 2013, when
the Bank of Japan introduced unprecedented stimulus to boost the nations
economy. The weaker currency is good for Japans exports and profits, according to
BOJ Governor Haruhiko Kuroda.
Still, the central bank may refrain from added stimulus because its becoming more
optimistic on prospects for the Japanese economy, Morgan Stanley said. The bank
previously projected the yen would weaken to 125 per dollar by the end of next
year.
"Markets overestimate the BOJs future easing intentions," analysts including Hans
Redeker, Morgan Stanleys head of global foreign-exchange strategy, wrote in
a report. "The BOJ has moved from a progressive towards a reluctant easing stance,
which is not yet priced into foreign-exchange markets."