Q. Why does Japanese Yen appreciate after Earthquake and Tsunami?
Japan has suffered a tragic natural disaster. Aside from the very real human tragedies, it will have an adverse economic impact. Yet, since the crisis, the Japanese Yen has appreciated in value. Why has the Yen appreciated when perhaps you may have expected the opposite?
One reason is that the Japanese are big purchasers of foreign securities. They have bought many foreign assets such as American, European and Asian bonds. Japan is one of the world’s biggest net creditors with $3 trillion (£1.86 trillion) of net overseas assets.[1. Telegraph] Therefore, a crisis in Japan may cause some investors to sell foreign assets and bring money back to Japan. This creates additional demand for Yen and pushes up the value of the Yen.
In short, fear causes Japanese investors to withdraw savings back to Japan. The significance of this is open to debate. But, it is one explanation for a rise in the value of Yen.
How A Crisis Could Cause a Fall in the Exchange Rate
- If a country experienced a demand-side shock (fall in aggregate demand) they may respond by cutting interest rates. Lower interest rates would reduce demand for the currency as fewer people saved in that country. However, Japanese interest rates are already close to zero, so Japanese rates cannot be cut any further.
- Inflationary Shock. If a country experienced a shock that led to inflation then that would reduce value of the currency.
- Fears over National Debt. If a country had a growing national debt, investors may fear that the government may default on repayments. This could cause a sell-off and fall in the value of the currency.
- Another paradox for Japan is that markets (currently) seem unworried about the size of Japanese national debt (over 220% of GDP) Despite the high rates of borrowing, Japanese interest rates are currently low and investors willing to buy bonds. (though debt levels are getting close to being unsustainably high)