Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being...

Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the

(a) U.S. demand for Japanese yen,

(b) supply of yen for sale, and

(c) equilibrium value of the yen?

Expert Solution

a) The US demand for Yen remains unaffected. Since the companies involved here are Japanese and there have been no indications that the imports are exclusively from the US, any change in the US demand for Yen can't be expected.

b) Supply of Yen for sale increases. The imports to Japan need to be purchased in currency from where these imports are being manufactured. Hence there will be a significant influx of Japanese Yen into the Foreign Currency Exchange Market for conversion of Yen into other currencies. Hence the supply of Yen increases.

c) The Equilibrium value of Yen reduces. Since the supply of the Yen into the foreign exchange market significantly increases, and from the Law of Demand and Supply when the supply [the supply curve tends to move towards the right] of a product in the market increases the value it holds drops. Hence equilibrium value of Yen drops in the foreign exchange market.

Rahul Sunny answered 2 years ago

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