Nottingham University Business School
MBA (Finance) Programme
N1DM28 International Finance
Discussion and analysis of the movement in the value of US dollar against the Japanese Yen from 2002 to 2011
Kala Premarani Perumal
Student ID: UNIMKL 010085
This paper is undertaken to discuss and analyse the exchange rate movements in the value of US dollar (USD) against the Japanese Yen (JPY) from 2002 to 2011. We could evaluate based on the exchange rates, that as an overall the JPY has appreciated against USD during this phase. The JPY had appreciated by 57% over these years (average 2002: ¥125.31/$ to average 2011: ¥79.72/$). The paper identifies the ...view middle of the document...
The JPY is the third most traded currency in the world, predominantly used for trade related payment and its international presence is ranked after the USD and Euro (NISM, 2011). JPY moves freely against all main currencies, however the Bank of Japan (BOJ) being the central bank occasionally intervenes in the foreign exchange market to keep the exchange rate constant with official policy to stabilize the currency (EIU, 2002). The intervention by BOJ is expected when JPY rises above ¥90 per USD (The Economist, 2008).
Figure 1: Unit JPY per USD Jan 2002 – Dec 2011
Source: International Monetary Fund (IMF), 2012
In the graph above, the JPY/USD monthly movement is shown from 2002 to 2011. The JPY had fluctuated between JPY132.66/USD (on Jan 2002) and JPY77.81/USD (on Dec 2011). Overall the yen appreciation trend of 70.5% was observed between these periods.
This paper explores the in-depth dynamics of JPY’s sturdy and remarkable appreciation against the USD. Figure 1 trend can be divided into 3 periods, characterized by the following given changes in the month-average exchange rates against the dollar:
1. January 2002 – January 2005: Appreciation (JPY132.66/USD - JPY103.21/USD)
2. February 2005 – June 2007: Depreciation (JPY104.88/USD - JPY122.62/USD)
3. July 2007 – December 2011: Appreciation (JPY121.59/USD - JPY77.81/USD)
2. Period 1 - January 2002 – January 2005
a) Economic Climate
Japanese economy started expanding again in 2002 after overcoming the negative impacts from great depression (The Economist, 2006). In 2003 the economic growth shown on Figure 2 of 1.41% gives an indication that Japan is on its way to accelerate the economy.
Figure 2: Gross Domestic Product (GDP) Growth Rate 2000 - 2004
GDP Growth rate | 2000 | 2001 | 2002 | 2003 | 2004 |
% | 2.86 | 0.18 | 0.26 | 1.41 | 2.74 |
Source: Google Public Data, 2012
The growth was driven by increase in investment and exports due to increased confidence of its economic conditions (Dipendra, 2007). Signs of the recovery also sustained the JPY’s strength against the USD.
b) Current Account Balance
Current account balance comprises of all the export and import of goods and services of a nation (Eun et al,2008). Figure 3 shows that Japan had maintained a strong current account balance in these periods and trade balance up to 2011 driven by export sector in the country. Based on economic fundamentals, the strength of current account gives rise to currency appreciation given that foreign importers demand for JPY to settle their payments to Japanese manufacturers.
Figure 3: Japan: Trade Balance and Current Account in billion USD
Source: JETRO – Trade Balance & World Economic Outlook – Current Account, 2012
However, in actual from 2002 to 2004 the JPY appreciated from JPY125.31 (average 2002) to JPY108.19 (average 2004) up by 15.8%, but the current account balance during the same period rose (not fall) from...