Us Dollar Vs Japan Yen Analysis

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This paper will cover the effects of the U.S. dollar’s strength in comparison to the Japanese Yen and how it affects supply and demand, prices, and product production. Specifically, I will talk about how the market influences consumer surplus, producer surplus and total surplus. Additionally, I will cover how the different categories of pricing and goods are impacted by the strength of the U.S. dollar versus the Japanese Yen.
Origin
In the beginning, it was believed that letting a country’s currency depreciate would have negative effects on the economy. Further study and time has indicated that currency depreciation has positive effects on a country’s trade balance in the long run. A study conducted from 1960-2011, indicates the positive
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It is widely believed that the long term affects outweigh the short term. In the study mentioned earlier, the yen rate appreciated during the 1980’s and coupled with deflation resulted in the value of the Japanese Yen increasing significantly in comparison to the U.S. dollar. The trade and flooding of the market with similar and new products stimulates the economy and in most cases drive the value of the native currency down. The presence of new products and services can drive the demand of specific goods. This demand can rise or fall based on resource …show more content…
This is incredibly apparent when the native currency (Yen) is only accepted to purchase these goods and services. The appreciation of the Japanese Yen causes the value of foreign currencies to rise, specifically the U.S. dollar. A good example that illustrates this is how the product of non-ferrous metal was affected by a two percent increase in the Yen rate versus the U.S. dollar. This increase, although slight caused the import to Japan become cheaper than the export, (Furukawa, 1992). Purchasing power parity (PPP) quantifies the relation between inflation exchange rates between two countries that are being studied; in this case we are referring to the Japanese Yen versus the U.S. Dollar. Here are two theories that I think are useful in determining what drives the relationship between the two currencies. The first is the absolute form of purchasing power parity, which states that given the fact that there are no international trade barriers, then the consumers will tend to shift their purchases to the country that offers lower prices (as measured by common currency), (Haque & Saba, 2012). The second theory of exchange rate determination is the interest rate parity theory (IRO). In this theory the major assumption is that one should not make a greater profit by taking advantage of an interest rate differential in these two countries since

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