Japan: Exchange Rate
Introduction
The exchange rate is sometimes referred to as the forex exchange rate or the forex rate. It can be defined as the rate with which one country’s currency is exchanged for another. In simpler terms it is the value of one currency with reference to another in terms of comparison between two countries. There are several types of exchange rates for example a spot forex rate is current rate of exchange while the forward exchange rate is a currently quoted exchange rate whose payment is made later. This essay aims at analyzing the concept of exchange rate with focus on Japan after the 9.0 earthquake, tsunami and subsequent breakdown of the functioning of the nuclear reactors.
Discussion
Depending on several factors the exchange rate of once country’s currency can either fluctuate or improve. The demand and supply of a cuyrrency will affect the exchange rate either negatively or positively. If the demand for a specific currency is greater then the value of that currency goes up. This consequently means that the supply for the currency will be low. Similarly if the value of a currency is low it means that the demand is low and consequently the supply will be high. Less value for a currency means that the population is no longer in need of that particular currency and that they have opted to invest in another countries currency (Radaelli, 2002).
The demand for a specific currency increases due to high transaction demand. High transaction demand refers to relative to the level of activity in a country in terms of business. Increased employment levels as well as the average domestic product of the country will lead to an increased demand for a currency. High employment rates in a country means that there is high demand for money as more and more individuals spend money on various goods and services. Similarly there will be low transaction demand if there is hardly any employment for a countries population. It will mean that the demand for money will be reduced and fewer people will be involved in the purchasing of goods and services. Change as a result of business transactions does not have a significant impact on the money supply in a country and the central banks in the countries affected easily accommodate such changes when they occur (Copeland, 2008).
A currency can also experience increased demand due to a rise in the speculative demand of the currency. Simply this means that if a currency of a country ahs a high interest rate more investors will be attracted to purchase that currency, if the interest rate is low then the investors are not keen to purchase that currency. The speculative demand for currency is much more difficult for the central bank of that country to manage as compared to the transactional demand. The central bank attempts to regulate the speculative demand therefore buy adjusting the interest rates of the currency regularly. Critics have argued that trading currencies on the basis for speculation undermines the actual economic growth of a country as the spectators who purchase these large currencies may cause a downward economic pressure of the currency (Radaelli, 2002).
Most recently after Japan’s earthquake and tsunami the WNC NEWS reported that the U.S dollar had dropped as result. Japan’s earthquake led to turbulence in the financial markets across the world whose impact was felt long after the quake. A day after the natural disaster in Japan the U.S dollar weakened and consequently led to a rise in the euro against the U.S dollar at 1.3794. Profits in the U.S dollar diminished as reports on the occurrence of the Japan tsunami spread. The Japanese yen was also significantly affected as a result of the tsunami. It was reported that the exchange rate for the yen sharply dropped after the 8.9 magnitude earthquake and the subsequent tsunami (Copeland, 2008).
Gradually the yen recovered after the earthquake and to-date the recovering process is still ongoing. The fluctuation of the yen can be attributed to the fact that the earthquake destroyed the economy of Japan and investors were not certain if the country would be able to get back to its fit. There was worry that the earthquake will cause the economy of Japan to stall and as a result the demand for the Japanese money dropped. After the tsunami though it was evident that Japan would get back on its feet in terms of reviving its economy, the gradual efforts by the government to revive the economy has attracted back investors and the demand for the yen is once again rising. Japan being the third largest economic power is trusted to be in position to recover and reclaim it economic position (Copeland, 2008).
It was expected that the U.S dollar would strengthen against the Yen as investors were expected to opt to buy the U.S dollar but unfortunately this was not so as the dollar weakened further after the earthquake. The value of the pound rose to the US dollar by $1.6054 per pound. It also weakened against the Swiss franc from 0.93$ per US dollar to 0.92 per US dollar (WNC NEWS, 2011).
The effect of Japan’s earthquake, tsunami and subsequent leaking of nuclear reactors in Japan had a significant economical impact on Japan. The effects trickled down and affected the other countries across the globe such as the U.S. considering that Tokyo is considered the financial centre of the Far East. Immediately after the disaster investors in Japan dashed to dispose off their equities, speculative commodities bond and any other investments that they found to be economically risky. The disposal of investments led to increased capital flow.
Few weeks after the dash to let go off the investments that were considered risky, the directional capital flow was till left intact, fear across the investors ceased. This led to divergent performances between financial pairs in the stock exchange that were considered to have consistence risk association. For instance the connection between the EUR USD and the NZD USD fluctuated to almost irrelevancy at 0.17. The Link between GBP USD and AUD USD dropped to 0.40%. Against the Japanese Yen the GBP USD sank to0.15, US CAD sank further to -0.26 and the EUR USD dropped to 0.16 (WNC NEWS, 2011)
If the exchange rates fluctuate the country faces a foreign currency risk which severely negatively affects the running of businesses in such a region. Fluctuations in the exchange rate can also affect a country that does not engage in foreign sales and purchases; this is possible with the pricing of competitor’s products which might fluctuate due to the effects of the exchange rate.
Many factors can influence the fluctuation of the exchange rate. For instance Japan earthquake subsequent tsunami and the following incidents with the reactors resulted to many Japanese investors rerouting the funds back into Japanese yen for the purposes of rebuilding the nation and the subsequent economy. The value of the yen subsequently increased with relation to other currencies in the stock market.
To ease the recovery of the Japanese Yen, the G-7 came together and intervened in the foreign exchange market. The first step was undertaken by Japan followed by Europe’s central banks, the main purpose was to send the currency down against the dollar so as to attempt to level the under a dollar yen rate. So as to reduce the chances of the third world largest economy plunging into recession Japan’s central bank promised to engage in monetary easing processes. With this the Nikkei 225 average stock gained momentum paring losses of 10% since after the quake disaster. The joint intervention is expected to lead to the economic recovery of the yen at a faster rate as compared to if Japan central bank handled the task buy itself. The joint intervention was expected total 2trillion yen (WNC NEWS, 2011).
Conclusion
The forex exchange rate can significantly be affected by numerous factors such as politics and occurrence of calamities such as the Japan earthquake. It is important that the government intervenes and saves the country from economic distress as such in Japan. The intervention of other countries in attempting to revive the economy of the country is a positive move in strengthening the value of the yen against other world currencies.
Reference
(WNCNEWS, 2011). U.S dollar falls due to earthquake and tsunami in Japan retrieved from http://www.worldnewsco.com/4267/u-s-dollar-falls-due-earthquake-tsunami-japan/ on 2ndMay 2011
Copeland, L. (2008). Exchange rates and international finance. Prentice Hall / Financial Times
Radaelli, G. (2002). Exchange Rate Determination and Control. Routledge
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