Question

Then work on Problems and Applications 2.15,at the end of Chapter 29, answering and discussing the questions in that exercise.

2.15

[Related to the Making the Connection on page 977] An article in the Economist notes that gasoline prices in Japan were increasing “because of the government’s efforts to drive down the yen.”

a. Why was the Japanese government trying to drive down the yen?

b. What actions was the Japanese government taking to drive down the yen?

c. Why would driving down the yen have increased gasoline prices in Japan?

Source: “Man with Plan,” Economist, July 20, 2013.

Answer 1

A]
To drive the Yen down the Bank of Japan deployed expansionary monetarypolicy. Leaders promised to increase bank holdings of government bondsand to buy other assets. This promised caused investors to sell theirJapanese assets in anticipation of higher inflation rates
Japan’s monetary authorities intervened in the foreign exchange market Wednesday for the first time in 6 1/2 years to stem the yen’s appreciation against the dollar and save the export-driven economy, Finance Minister Yoshihiko Noda said.
After Noda confirmed the move, the yen fell from a 15-year high versus the dollar, tumbling the most in four months.
The yen fell past 85 per dollar for the first time in almost two weeks, trading at 85.39 at 5:32 p.m. in Tokyo. The currency had risen more than 11 percent from mid-May through Tuesday. Against the euro, the yen fell 2.6 percent to 110.78.
The yen was as strong as 82.88 to the dollar earlier, the highest level since May 1995. It fell to 109.69 per euro from 107.92. The euro was at $1.2963 from $1.2998.
Later in the day, Japan intervened in the European foreign exchange market as well, a Finance Ministry official said.
The intervention came a day after Prime Minister Naoto Kan won re-election as the head of the Democratic Party of Japan by beating Ichiro Ozawa, who had specifically called for intervention to help shelter

b]

The Japanese government has been trying recently to "talk down" the value of the yen inan attempt to stimulate the economy by expanding exports (and curtailing imports). Isympathize with the desire to help the economy, but this strategy is unworkable forseveral important reasons.First of all, exports are not a very large share of the economy. Twenty years, exportsconstituted around 14 percent of GDP, but today they account for only about 9 percent.That means exports would have to grow a great deal to have much impact on the overalleconomy. For example, it would take a hefty 25 percent increase in exports to boost GDPby two percent. That impact would be spread over about two years, yielding a roughly onepercent annual increase in GDP?hardly enough for a strong economic recovery.And whether yen depreciation alone will produce even this much expansion of exports isdoubtful. Years ago a high export growth rate was possible because Japan was a smallcountry whose industries were just breaking into global markets on the basis of pricecompetitiveness.

The government drives the value of Yen down in order for their trades to be moreprofitable in the global market. The idea is to encourage other countries to buy moreJapanese products because if the yen is weak, it would less expensive for foreigners tobuy Toyota, Nissan, and Honda along with other products that Japan exports. The negative effect in driving down the value of yen is that becomes more expensive forJapanese consumers to purchase imported products. For example, if the oil costs $100 perbarrel. If Yen was valued at a ration of 1:1 with the US Dollar, it would cost the Japanese100 Yen to buy a barrel of oil. However when the yen is 2 to 1. It would cost 200 Yen tobuy a barrel of oil.