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Foreign Exchange Rate

We often hear “strong yen” and “weak yen” in news programs. Theses words are strongly related to floating exchange rate system. In floating exchange system, currency value fluctuate every day and every minutes depending on supply and demand. Strong yen means the value of yen increases and weak yen means the value of yen decreases.

World finance crisis in 2008 is a good example of strong yen. The bankruptcy of mega security company, Lehman Brothers, caused the financial crisis, starting in the US and spread to the world.

At that time, because market roughly fluctuated and US dollar became unstable, many investors sold US dollars and wanted to buy Japanese yen. As a result, demand for Japanese yen increased and accordingly strong yen advanced. Thus, when demand is increasing, value of currency goes up. On the contrary, when demand is decreasing, value of currency goes down.

Influence on Economy by Flactuation of Japanese Yen

Fluctuation of Japanese yen have great impact on economy. When Japanese yen is strong, export industries have difficulties to make profit. On the other hand, import industries make extra profit.

For explanation, we exemplify 2 companies, B and T. B company mainly import cars and T company mainly export cars.

Situation 1: Strong yen advances from ¥100 against dollar to |80 against dollar.

Company B: In purchasing $10,000 cars, they can purchase cars at \800,000 each. Originally the price in Japanese yen is \1,000,000. Therefore they can cut expenses by \200,000 each. If they can keep the selling price, they can increase profit accordingly.

Company T: In selling $10,000 cars overseas, their selling price reduces from \1,000,000 to \800,000. Therefore they have difficulties to make profit.

Situation 2: Japanese yen weakened from \100 against dollar to \120 against dollar.

Company B: Expenses for purchasing $1,000,000 cars increases from \1,000,000 each to \1,200,000 each. Therefore expenses increases by \200,000 each.

Company T: Sales of selling $10,000 cars overseas increase from \1,000,000 each to \1,200,000 each. Therefore they can make extra profit of \200,000 each.

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