The Economy of Japan - Essay Example

Exchange rate in a floating regime are determined by the supply and demand for a that currency, if the demand for a currency is high then the value of the currency will appreciate against other currency, if demand for a currency falls and speculators sell the currency then the value of the currency depreciates against other currencies. This paper analyses the factors that have contributed to the fluctuations in the Japanese yen exchange rate, this factors include inflation, interest rates, unemployment levels, monetary policies, fiscal policies and trade balances and other factors.

Inflation is the rise in prices of products in the entire economy for a long period of time, inflation is caused by increased money supply or even an increase in the level of prices of inputs such as crude oil prices, there exist two types of inflation as Keynes depicted, the cost push and demand pull inflation, in Japan the level of inflation has risen steadily and this means that the local currency namely the Yen has appreciated over time against the other major currencies. Governments will always try to balance inflation and unemployment levels, according to the Philips curve the.

Unemployment can be defined as the number of people who are jobless in an economy it is calculated by dividing the number of people who are unemployed with the number of people who are termed as the work force in an economy it may also refer to a condition in which an economy has idle resources that are not being utilized.Today japans unemployment levels have declined to 4.0% since May this year, the highest recorded level of unemployment in Japan from 1953 because this is when the economy initiated records was 4.

8%, unemployment can be reduced through the use of fiscal and monetary policy, unemployment has slightly gone down in Japan, this decline is as a result of increasing interest rates, when interest rates increase the cost of borrowing capital rises and therefore less investment will occur in the economy and this will result into a decline in the employment rates. Therefore the decline in unemployment means that the exchange rate will appreciate.Interest rates:Interest rates are referred to as the cost of borrowed funds, a rise or drop in interest rates will affect the exchange rate of a countries currency, the interest rates are expected to rise according to the Japanese, when interest rates increase then the currency will appreciate, however if low interest rates exist in a country its currency will devalue.

Today interest rates are rising and therefore the value of the yen is appreciating against the other major currencies, this is the reason why the Japanese yen has appreciated against the US dollar for the past two months as a result of rising interest rates.Trade balance:Trade balances occur when the level of exports do not balance with the value of imports, when there is a positive balance of trade whereby exports exceed imports then