The rise and fall of Japan's Yen

Running head: THE RISE (AND FALL) OF THE JAPANESE YEN 1

The Rise (and Fall) of the Japanese Yen

Lawrence Cifarelli III, Nazanin Ershad, Natthima Sonsoem, Anyesha

Mahaptra

University of New Haven

THE RISE (AND FALL) OF THE JAPANESE YEN 2

Abstract

This Case study provides an insight to the fluctuations

experienced in the currency of Japan, Yen from the late 1990’s to

recent years. Japan follows the floating currency monetary policy

due to which there is no measures taken on to control the

fluctuations. Japan experienced magnificent growth through the

60's, 70's, and 80's leading into the 90's beginning. In the late

1990's, Japan’s economy marked its growth significantly slower,

which had then come to be known as the 'lost decade' due to

Japanese Asset Price bubble that collapsed. Eventually the nation

faced major issues regarding environmental disasters, hollowing

out of industries, etc. The past events which have caused the

rise and downfall of Japanese Yen has been illustrated for

examining the causes of the appreciation and depreciation of this

currency. The influence of this floating currency on Japan's


economy has been depicted in this case study. This paper also

provides some applications of the measures that can maintain the

stability of the Japanese Yen.

Japan experienced tremendous growth throughout the 1960s,

1970s, and 1980s leading into the leading into the early 1990s.

After World War II, Japan underwent a period of restoration

followed by the events in 1978 where Japan excelled as a

manufacturer partnering with the United States which helped to

make its economy world's second largest economy until 2010, where


it was surpassed by China, moving Japan to the world's third

position. Japan’s economy saw growth slow significantly in the

late 1990s which came to be known as the 'lost decade' due to the

Japanese Asset Price Bubble collapse. This phase saw Japan run

massive budget deficits in order to finance the huge spending

programs of the government. However, this spending did not much

help to incur growth to Japan as the nation faced deflation

numerous times between 1999 and 2004 in a span of 5 years.

For the following issues the Bank of Japan (BoJ) responded

by embarking on Quantitative Easing (QE) in the early 2000's

which did little to quell the deflation and Yen Strength that had

plagued the nation entirely.

The major problem for the export-heavy nation became the

strength of the Yen. When the exporters saw a more expensive Yen,

they faced more difficulty to compete with domestic manufacturers

in other nations. Also, due to extremely low rates of interest in

Japan, it experienced massive outflows of capital from retirees

and investors looking for yield in other economies such as United

States, Europe and Australia.


Subsequently, the Japanese economy maintained a long-lasting

recovery beginning in early 2002. However, the path has not

always been smooth, given two "soft patches" (temporary softening

in the market) and weakness in some parts of the economy.

Japan commenced on a multi-pronged approach by June 2012 in

an urge to end the multi-decade slide that was seen in growth

numbers for its economy. This approach was initiated by Shinzo

Abe during his campaign for Prime Minister, once installed as the

political leader of Japan’s economy with Hiroki Kuroda installed

as the head of the Bank of Japan, the country spurred into

putting effort in order to inculcate inflation consequently

inflation back to the nation.

The current Japanese bond market bubble has contributed

greatly to the fluctuation of the Japanese Yen. The “burst” of

the bond bubble in Japan had a large effect on banks and all

firms and companies which caused a lot of damage to the Yen. The

“bubble burst” in Japan lead to a sharp decline in land prices

for the entire Japanese society which lead to many people going

bankrupt (Ito 1996). The burst caused the price of land to fall


drastically and it not only caused the value of land to fall, but

also the housing market followed in its place. This situation

makes it so that people’s houses become less valuable and “under

water.” This term means that individuals paid more for their

house than what the current value is. In the United States, this

situation has caused people to trash and vacate their houses due

to the fact that they owe much more than what it is currently

worth. The bankruptcy of hundreds, if not thousands of people,

regardless of the location of the country leads to economic

downfall. When people are bankrupt or have little money to spend,

they tend to buy less product which lowers the demand thus

causing the supply of the product to increase. This likely causes

the price of any given products to decrease, thus causing

deflation of prices meaning that the Yen will follow and decrease

in value.

Considering the facts that “many Japanese banks have

substantial holdings of stock in the firms and groups of firms

with which they have long-term relationship,” many banks were hit

hard during the burst of the bond bubble (Ito 1996). Due to this


burst, banks were forced to report net losses because of the fact

that they needed to supply write-offs to housing loans companies

as no one was paying their loans, as discussed above, basically

because of the fact that it makes no financial sense to pay

exponentially more for a house than what it is currently worth.

Banks suffered greatly from the bond burst, therefore, “at the

end of March 1996, the banking sector was holding 35 trillion Yen

of nonperforming loans, which represents about 7 percent of GDP”

(Ito 1996). According to www.investopedia.com, a nonperforming

loan is “a sum of borrowed money upon which the debtor has not

made his or her scheduled payments for at least 90 days.” Since

people were not paying any of their loans during the time after

the burst of the bond bubble, the Yen depreciated a good amount

due to how many people halted their spending in the Japanese

economy and basically lead to a major decline in the decline of

the Japanese economy at this time.

Another main issue that contributes to the fluctuation of

the Japanese Yen would be the response to the appreciation of the

Yen and the Japanese government intervening in the market. “In


September 2010, the Japanese government and the Bank of Japan

took decisive action to lower the value of the Yen, helping

Japanese exporters by selling ¥2.13 trillion in Yen and

purchasing dollars” (Hays 2009). Japan wanted to lower the value

of the Yen by intervening in the market, and that is exactly what

they did. Once the intervention occurred, the price of the Yen

weakened to ¥81.08 in October 2010 which was a 15½ year low from

April 1995 of ¥79.75. Japan intervened in the market and wanted

to lower the value of the Yen in order to help with exports and

that they did that undoubtedly. By lowering the value of the Yen,

Japan not only increased their exports, but they were also able

keep a lot of Japanese manufacturers in the country considering

the fact that the higher the value of money is in a given

country, the more money it will cost to open up new manufacturing

plants and other factories. Not only does the government

intervening keep manufacturers in the country, but it also saves

jobs and allows for these companies to buy goods in Japan rather

than outsourcing which is good for the Japanese economy.


Geographical position is an important factor for a country’s

economic growth. Each year Japan is exposed to lots of

earthquakes. On March 11, 2011, a magnitude-9 earthquake shook

northeastern Japan, releasing a harsh tsunami. Tsunami killed

around and 18000 people and damaged the cooling system of

Fukushima Daiichi Nuclear Power Plant. After this damage about

300 tons of radioactive water leaked from the plant every day

into the Pacific Ocean. This disaster had a clear effect on

Japan’s economy. After tsunami the value of Yen rose to 76.25 Yen

against the U.S. dollar. It may seems strange that, the Yen is

being bought even when the Japanese economy itself is a source of

concern! According to Kyodo News the reason that Yen bought up in

a time of crisis is “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 and lifting the currency by nearly 5 Yen against the

dollar.” And the reason why the Yen considered ''safe'' even


after the earthquake and tsunami is “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.”

Japan’s economy had its ups and downs in last 20 years but

the average inflation rate has been zero. Lack of inflation for a

country’s economy is as harmful as high inflation rates because

when there is no inflation in a country, it is more attractive to

people simply hold cash than make investments.

Chart – historic CPI inflation Japan (yearly basis) – full term


In order to solve the inflation problem, Bank of Japan

applied a policy called quantitative easing program. Quantitative

Easing is a monitory policy for lowering interest rates and

increasing money supply, in which the central bank buys

government securities or other securities from the market. The

Bank of Japan applied this program in three different stages

(QE1, QE2, QE3) targeting 2 percent inflation rate in the

country.

QE1:

Began in March 2001. After two years, the Bank of

Japan’s increased its monetary base by roughly 60 percent. That

program came to a sudden pause in March 2006.

QE2:

Was implemented in October 2010 and has gradually

transformed into the recent more aggressive interferences.


QE3:

Began in April 2013 after pledging to double money base

with a quantitative and qualitative monetary easing (QQE) program

of asset purchases in two years.

Based on some theoretical papers, QE is expected to be

ineffective when used under conditions of a zero interest rate

policy, because it does not affect the general equilibrium level

of interest, but based on data released by the Bank of Japan,

when we look at its impact on long-term interest rates and bank

equity, it can be effective because excess returns were larger

when they apply QE.

In the past, many Japanese firms were mono-culture and

mediocre. Now, everything has changed. Japanese firms wisely rely

on local talent. New generation of Japanese executives have lived

and worked aboard. That means they are more comfortable doing

deals with foreigners, and they are getting better at integrating

the foreign firms they buy with their new Japanese owners. In

2011 Japan became the world’s third most acquisitive nation.

Japanese investors have continued to buy assets abroad with a


particular focus on Europe. The Economist reported that Japanese

firms spent a record $80 billion on some 620 foreign companies

exceeding the previous record of 466 deals worth $75 billion in

2008.

In addition, the Japanese population is ageing and

shrinking. The economy is sluggish. Consumption is lackluster. So

Japanese firms find it nearly impossible to expand domestically.

At the same time, because of the crises elsewhere in the rich

world, the Yen is extraordinarily strong. It has appreciated by

45% against the dollar in the past four years. And having learned

thrift during their own banking crisis a decade ago, Japanese

firms are flush. With all this buying power and few opportunities

at home, it is hardly surprising that Japanese firms are snapping


up foreign companies, especially in fast-growing emerging

economies. Tadashi Yanai, the boss of Uniqlo's Fast Retailing, a

big clothing firm said that although Japanese firms is growing,

they are not be able to stay alive in Japan. The economic crises

in America and Europe have pummeled share prices, making

companies cheaper to acquire. Owner of Uniqlo is seeking to buy a

larger rival in Europe or the U.S., as a record-strong Yen is

pushing up the Japanese company’s spending power. Fast Retailing

is accelerating on the global market, despite the 12 percent drop

in profit in the last financial year, ended in August. The

company opened two new stores in New York last month and seeks to

increase six times its sales through 2020, to $64 billion, and

become the world’s largest cloth retailer.

Hollowing out denotes the undermining of a country’s

manufacturing sector when domestic producers opt for investing

and producing in lower cost facilities overseas. This issue of

hollowing-out, also known as kudoka, in Japan had brought many

cons of domestic manufacturing affecting the currency, Yen. As a

result, about 220,000 manufacturing sites got extinct between


1996 and 2006, causing a great loss of about 3 million jobs in

Japan. Also the consequences of the March 11 catastrophe has

augmented this trend. While the Yen remained strong, the great

east Japan earthquake had disrupted the supply chains and

electricity shortages. Against this backdrop, productions were

being forced to shift with its related facilities to abroad.

According to a recent survey, nearly 70 percent of businesses are

now located overseas. 2011 meltdown of the Fukushima nuclear

plant at Japan recorded the continuous purchase of liquefied

natural gas (LNG) to try and fill the energy shortfall making it

a cripplingly dependent on imported natural gas, oil and coal.

Another problem often mentioned as hindering the competitiveness

of Japanese businesses was overregulation determined by the entry

rate and exit rate of companies which was about 2%. Other

constraints frequently seen were high corporate taxes, rigid

labor markets, deflation, and delay in signing free trade

agreements and the expected contraction of the domestic market as

the Japanese population decreases in size because of demographic

trends. Japan also has very high logistics costs like the


highway road toll fee, which is 100 when compared to USA which is

0. Japan faces a problem of aged population consisting of 31.90

million, that is, 25.1 percent of total population with the age

of 65 years and over. It has a shrinking younger generation,

which reduces the productivity rate of the population. More and

more major manufacturers are capturing fewer parts domestically

and investing overseas to diminish the impact of the super-strong

Yen, a trend that is hurting small and midsize local firms and

could weaken the industrial sector. Mitsubishi Motors Corp.

President Osamu Masuko said "a Yen-dollar exchange rate in the 76

Yen range against the dollar is a tough level for companies that

are highly dependent on exports. MCC raised the percentage of

parts it buys overseas from 18 percent to 25 percent in 2013 to

cut costs. Nissan Motor Co. President Carlos Ghosn also said his

company plans to raise the percentage of parts bought from South

Korea and China, as well as Kyushu from where parts can be

shipped relatively cheaply from about 70 percent now to between

80 percent and 90 percent.


The US Dollar decreased to 108.11 Japanese Yen in October 2014

from 109.58 in September. The Japanese Yen averaged 155.26 from

1972 until 2014, whereas it had an all-time high of 306.84 in

December of 1975, a record low of 75.74 in October of 2011.

According to the Ministry of Economy, Trade and Industry's

"Survey of Overseas Business Activities," which surveys Japanese

companies that have production and manufacturing bases overseas,

a number of overseas affiliates in the manufacturing industry was

10,425 companies at the end of fiscal 2012 which was an increase

by 20.0 percent, and the overseas production ratio was 20.3

percent in actual performance in fiscal 2012 which showed an

increase of 2.3 percentage as compared to the previous fiscal year.


In the future, it is anticipated that companies in the

manufacturing industry in Japan will expand their overseas

businesses. There are many companies that are planning on expanding

their business to Indonesia, India, Thailand, and China. Japan is

also increasing interest in new markets such as Myanmar and Mexico.

The Japanese government announced an economic policy called

"Abenomics" in January 2013. Abenomics basically constituted fiscal

policy, monetary policy, and economic growth strategies to

encourage private investors and producers. These policies included

inflation targeting at 2% annual rate, stabilizing of the excessive

Yen appreciation, setting up negative rate of interest, buying

operations of construction bonds by bank of Japan, expansion

of public investment and revision of the Bank of Japan Act. As a

result, economic conditions have turned toward recovery, and

improvements in earnings, centering on enterprises in the

manufacturing industry, growth of Yen was seen.

By judging the past events of Japanese economy, we would like

to suggest measures where the Japanese Government should encourage

the birth rate to increase to rise the percentage of younger able

generation. The more skilled men would increase the productivity


level of the nation by encouraging domestic investments. Also, the

government should keep complete check on strong Yen appreciation.

The Yomiuri Shimbun reported: “Increasing numbers of people

are opening foreign currency deposit accounts to take advantage of

the Yen's historically high levels. If the Yen's value against the

U.S. dollar, euro and other major foreign currencies falls,

depositors can earn profits by exchanging their foreign currency

deposits into Yen. However, the accounts carry a degree of risk.

Losses may balloon if the Yen appreciates further and may even

cause a loss of principal.

Yen can be exchanged for the U.S. dollar, euro and other

foreign currencies and deposited in foreign currency accounts at

most major banks. Depositors can invest also in many other foreign

currencies, such as the British pound, Swiss franc and Australian

dollar”.

However, would-be depositors should exercise caution. Yasuhiko

Fukano, a financial planner, warned, "Depending on moves in foreign

exchange markets, there is a risk people may even lose substantial

amounts of their initial investments."


However, Yasuhiko Fukano, a financial planner says this

calculation does not take interest rates into consideration. When

major foreign currencies are concerned, the Australian dollar

denominated deposit service is probably the only one with

relatively high interest rates on it. Because interest rates in

many other foreign currency deposits are low, it's difficult to

offset losses from further appreciation of the Yen with interest".

Commission fees is the compulsory fees charged when the Yen is

exchanged into a foreign currency and when the foreign currency is

exchanged back into Yen. This factor is important for investors to

be aware of.

"When you choose to deposit foreign currencies, pay attention

to the commission fees," said economic journalist Hiroko Ogiwara

from his research. She said, "Even if the exchange rate is the same

at the time of deposit and withdrawal, the required commissions

will ensure a loss.” Mostly Commission rates vary among foreign

currencies or among financial institutions. In the case of the U.S.

dollar, most major banks charge 1 Yen in commission per dollar when

both deposits and withdrawals are made. But many online banks

charge lower commissions that is about 0.25 Yen per dollar.


Japan's per-capita gross domestic product in 2010 stood

at $42,983, advancing to 14th in the rank of developed economies

from 16th the previous year, helped by the sharp rise of the Yen

against the U.S. dollar, the government said. The list of 34 OECD

countries by per-capita GDP was topped by Luxembourg, which logged

$105,313, while Norway ranked second with $84,473. The United

States was eighth with $46,588. The per-capita GDP of China, not a

member of the OECD, was $4,430.

There is a the speculation about why Japan is tolerating

an exchange rate that so many people think that it imperils its

growth and sovereign credit rating. One of the theories is that

it’s a generational phenomenon. A stronger Yen mostly benefits the

elderly. It exacerbates deflation, enabling retirees to stretch


their pensions and savings. Politicians may be loath to risk

electoral support with a weaker Yen. Another theory is that Japan

wants to encourage mergers and acquisitions to wring out

inefficiencies, boost competitiveness and gain new markets.

Demographic trends are prompting Japan’s Government Pension

Investment Fund to trim its debt holdings. The fund oversees $1.45

trillion of assets, an amount greater than China’s holdings of U.S.

Treasuries and more than most sovereign-wealth funds have to

invest. The pension fund’s move may signal a weaker Yen in three

ways. First, as Japan ages, huge pension funds will have to invest

more abroad for higher-yielding assets. Second, the Bank of Japan

will have to add more liquidity to the financial system to absorb

large bond sales, which is essentially another quantitative easing.

Third, it means that the big money will be bidding less on

government debt auctions. All of this may have other major debt

holders, Japanese or otherwise, considering sales of their own. And

selling debt today might lock in much richer gains than a year from

now.

For Japan, the greatest recommendation that we could offer

them is to not have their economy rely so heavily on the bond


bubble because when it does indeed burst, like it has in this

example, their economy and the price of the Yen takes a drastic

hit. I also believe that the banks should not rely as heavily on

the stocks of different firms and companies in Japan because the

banks should be receiving the majority of their income from what

their business is, providing loans and getting the principal and

interest back in return. The fact that banks rely so heavily on

companies is not a good thing for their economy and should be

changed in order to ensure that if and when this bond bubble bursts

again, the Yen will not take such a major hit.

In terms of the government intervening, we recommend that

they should continue to do so as long as they see it fit.

Clearly, when the government intervened in September of 2010,

even though the price of the Yen dropped to a 15 ½ year low, a

lot of good came out of it for the Japanese people. Even though

we do not expect the government to intervene every time that

there is a problem with the Japanese economy, we do believe that

when it is possible, they should step in and either buy or sell

Yen in order to increase or decrease its value for the economy of

Japan rather than leaving it up to the market.


Regarding the Quantitative Easing policy conducted by the

Bank of Japan, we think they should continue their policy until

the economy in Japan reaches a more stable position, because QE

policies have supported economic activity, although the

statistical significance varies in different estimates. Also, the

results from this paper imply that the monetary policy

transmission mechanism have strengthened the result of

improvements in the banking sector.

In terms of foreign investments, Japan is doing very well to

improve its economy as well as its GDP. We recommend that Japan

continues investing in foreign countries to help the economy

grow. However, Japan should be concerned about jobs lost in the

domestic economy when a factory moves abroad, and about downward

pressure on wages at home due to the availability of cheaper

labor abroad. Job losses can mean that displaced domestic

workers, though unlikely to remain unemployed permanently, may be

forced to take lower-paying jobs. But any downward pressure on

wages in general may be offset by lower prices for domestic

consumers as a whole due to the movement of the factory.


Currency moves can have a wide-ranging impact not just on a

domestic economy, but also on the global one. Investors have some

advantages from the fluctuation of currency by investing overseas

resulting in a rising GDP. However, there are some impacts on the

economic system leading to government intervention. The

fluctuation of currency is influenced by numerous fundamental and

technical factors. These include economic performance, outlook

for inflation, interest rate differentials, capital flows,

technical support and resistance levels, and so on.

Among all the countries Japan ranks 216 in the birth rate

which is very low. One major recommendation for increasing the

productive age of Japan would be to encourage birthrate by

various rewarding policy to the families with medical facilities

for women to conceive.


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Ito, Takatoshi (1996). Japan and the Asian economies: A “miracle”

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http://www.tradingeconomics.com/japan/currency

The rise and fall of Japan's Yen

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