end of course essay forex maket topic an analysis of usdjpy fluctuation from 2011 to 2021, as well as solutions for reducing the value on

The monetary and foreign currency policies of the United States and Japan are studied...4 2.2.2.. USD/JPY exchange rate movement in 2020 to 2021 Source: Macrotrends The US Federal Reserv

UNIVERSITY OF UEH BUSINESS SCHOOL BANKING DEPARTMENT

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-End-of-course essay

Forex Maket Topic: AN ANALYSIS OF USD/JPY FLUCTUATION FROM 2011 TO 2021, AS WELL

AS SOLUTIONS FOR REDUCING THE VALUE ON Class code:

Lecturer:

Name:

Batch: K45/DHCQ

Class: NHC01

Ho Chi Minh City, November 2021

I INTRODUCTION 1

II ANALYSIS OF THE USD/JPY VALUE FROM 2011 TO 2021 1

2.1 A synopsis of the USD/JPY currency pair's variables from 2011 to 2021 1

2.2 Examine the factors that contribute to currency fluctuations 3

2.2.1 The monetary and foreign currency policies of the United States and Japan are studied 4

2.2.2 Analysis of the influence of interest rate differentials between the Fed and the Bank of Japan 6 2.2.3 Inflationary pressures in Japan and the United States are explored 9

2.2.4 Examine how the balance of payments affects you 11

III EXCHANGE VALUE LIMITATION METHODS 11

3.1 Put in place policies to assist the economy thrive while keeping inflation under control 11

3.2 Reduce the spread between the two countries' interest rates 12

IV CONCLUDE 13

Reference 15

List of Chart

Chart 1 USD/JPY exchange rate movement from 2011 to 2021 2

Chart 2 USD/JPY exchange rate movement in 2020 to 2021 3

Chart 3 US/JP 10-year Bond Yield Spread vs USD/Yen 8

Chart 5 Asset holding 9

Chart 6 Inflation and employment in Japan 2017 – 2019 10

I INTRODUCTION

According to the World Bank, Japan has the world's third largest economy Japan is a big exporter of items to other countries Because of Japan's substantial trading with the United States, Asia, Europe, and other countries, multinational firms must routinely convert local currencies into yen.

Having said that, it is becoming increasingly frequent in trade to sell yen for yen The Japanese yen (JPY) is Asia's and the world's most traded currency JPY made up over 21.6 percent of daily trading in 2016 There was conjecture in the 1980s that the yen would eventually join the US dollar as a world reserve currency The Japanese yen can also be used as a proxy (alternative) for Asian economic growth because it is Asia's most liquid currency Investors might buy

or sell the Japanese yen when economic or financial crisis threatens Asia.

However, as the global economy improves and more investors prefer to relocate their capital to USD or other strong currency alternatives, the JPY tends to decrease The pandemic's impact on the global financial sector is now enormous, producing exchange rate fluctuation Long-term interest rates have risen as a result

of a strong sell-off in the US Treasury bond market; the Japanese government bond (JGB) is also under pressure As a result, I decided to look into the USD/JPY exchange rate's volatility as well as ways to decrease volatility

II ANALYSIS OF THE USD/JPY VALUE FROM 2011 TO 2021

2.1. A synopsis of the USD/JPY currency pair's variables from 2011 to 2021

The USD/JPY rate is one of the world's most traded and liquid currency pairs because the Japanese yen, like the US dollar, is a widely used reserve currency The bid/ask spread on the USD/JPY pair is minimal, and the pair has high liquidity Despite the fact that the Japanese economy has failed in the twenty-first century, the yen has remained

a safe haven currency that people resort to when market volatility emerges

Chart 1 USD/JPY exchange rate movement from 2011 to 2021

Source: Macrotrends

Over the previous decade or so, the USD/JPY pair has experienced numerous price swings During the Great Recession of 2008, the USD/JPY pair spent the most of the year above the 90 mark The biggest loss was in January 2012, when one dollar was only worth

76 JPY After bottoming in early 2012, the USD immediately recovered traction, signifying the start of the pair's long uptrend In May 2015, the ratio reached a high of 124

In 2016, when the USD was valued at roughly 100 yen, the next large decrease happened Financial markets became disappointed with the Trump administration's pro-growth policies, causing the fall.

In 2017, the outlook for the USD/JPY shifted as the US economy continued to report strong results and grow at a rapid pace, boosting the US dollar.

The yen functioned as a safe haven during the trade war's development in 2019, while the

US economy's confidence kept the Greenback strong The couple has managed to stay

above the 100-point mark From late 2019 through October 2021, the coronavirus outbreak had an impact on all financial markets, including Forex.

Chart 2 USD/JPY exchange rate movement in 2020 to 2021

Source: Macrotrends

The US Federal Reserve decreased interest rates in 2020 in an effort to minimize the economic impact of the epidemic The Bank of Japan is also aiming to supply liquidity to the market in dealing with the effects of the Coronavirus After the Fed expressed its thoughts on actual inflation statistics in early 2021, the JPY dropped against the USD The JPY declined against the USD given the difference in yields between US and Japanese government bonds, as well as future inflation forecasts By the 29th of October, the USD/JPY had risen to about 114.5 and had bounced off the 100 SMA Many experts believe that this currency pair's rate will remain below 100 in 2023, ending at 93.93

2.2. Examine the factors that contribute to currency fluctuations

2.2.1 The monetary and foreign currency policies of the United States and Japan

are studied

Despite the fact that academics disagree on whether central bank interventions are effective, it is vital to examine their possible influence The Bank of Japan (BoJ) takes action in the currency market when yen fluctuations threaten Japan's exports

or economic growth.

In 2006, the Bank of Japan ended its quantitative easing program (increasing the money supply through open market operations) When the Japanese economy began to recover and inflation returned in early 2007, the United States went into recession, followed by the European public debt crisis, and the entire globe went into economic crisis Japan had officially entered a recession at this point, and deflation had returned as well The Bank of Japan is required to cut interest rates to 0.3 percent, and the Japanese government is considering another bailout However, Japan's present recovery was hampered by the global economic situation at the time, as well as the JPY's appreciation To address labor market challenges, the Japanese government proposed a fresh economic stimulus plan totaling JPY 23 trillion (USD 242 billion) on December 12, 2008 A record budget of 88.5 trillion yen ($980 billion) for the 2009 fiscal year was approved on December 29, 2008 (starting April 2009) Shinzo Abe, Japan's prime minister, assumed office in December

2012, hoping to rebuild the country's economy He suggested Abenomics, a "three-arrows" policy consisting of monetary easing, fiscal consolidation, and economic transformation The first arrow has a direct effect on the yen exchange rate

The Bank of Japan (BoJ) governor, Haruhiko Kuroda, stated in April 2013 that the agency planned to attain a 2% inflation rate in two years by a qualitative expansion policy (QQME) The size of the new monetary policy target, the base money, will be increased from 138 trillion yen (end of 2012) to 270 trillion yen, regardless of interest rate movements (end of 2014) As a result of this strategy, the base currency's share of GDP will more than double, reaching approximately 60% in the future Until 2007, the global money-base to

GDP ratio was around 5% to 10% This shows that the Bank of Japan is experimenting with new monetary policies The purchase of Japanese government bonds, particularly bonds with maturities ranging from 6 to 8 years, was used to boost monetary volume and have a long-term qualitative effect on interest rates and capital markets

The Bank of Japan has pursued this policy in order to cut long-term interest rates, which has benefited real assets while harming the yen's foreign exchange rate The Bank expects that by doing so, it will be able to promote overall economic demand while minimizing deflationary pressures on specific economic units Greater pricing, higher incomes, more investment, and more consumer goods purchases will appear at the conclusion of the chain of impacts The demand gaps in the overall economy will be filled

The yen jumped in the fourth quarter of 2016 as the Bank of Japan decided to keep its monetary policy unaltered, raising the basic money supply by almost 80,000 billion yen (equal to about 648 billion USD) Despite the fact that exports and output remain weak due

to developing nations' poor development, the bank claims that the Japanese economy

"continues to be on a moderate recovery trend" as a result of the asset purchase program

A high yen, on the other hand, may hurt corporate profits and stymie the Japanese government's and Bank of Japan's efforts to bring the country out of a deflationary spiral The Bank of Japan made this decision after the US Federal Reserve Bank (FED) kept interest rates constant on June 15, 2016, citing the possibility of Britain exiting the European Union (EU), which has caused anxiety The yen gained more than 1% against the dollar immediately following the Bank of Japan's decision, reaching

a high of 104.53 yen to 1 USD, its highest level since September 2014 The euro fell against the yen as well, going from 119.17 yen before the monetary policy decision to 117.84 yen, its lowest level in more than three years.

According to data from the Bank of Japan, the corporate commodity pricing index (CGPI), which measures the prices corporations charge for goods and services, increased by 5.6 percent in the previous year (BoJ) Compared to the same period last year, July 2021 will

be greater than the market's ordinary projection of a 5% gain The index jumped from a 5% rise in June 2021 to its highest level since September 2008, when it jumped 6.9% In July

2021, wholesale prices grew 1.1 percent over the previous month, following a 0.6 percent increase in June 2021, the highest increase since October 2019 Despite evidence of economic growth, the Bank of Japan has no intention of tightening monetary policy

After committing not to raise interest rates until at least 2024, the Fed now predicts a rate hike in 2023 in 2021 The Bank of Japan, on the other hand, decided to keep all monetary policy measures same, despite a more optimistic assessment of the economy (short-term interest rate -0.1 percent, long-term interest rate 0 percent) All of this contributes to the monetary policy management disparity between the US and Japan

2.2.2 Analysis of the influence of interest rate differentials between the Fed and

the Bank of Japan

Factors affecting the value of the US dollar and the Japanese yen in respect to each other or to other currencies have an impact on the USD/JPY currency pair As

a result, the interest rate difference between the Federal Reserve (FED) and the Bank of Japan (BoJ) has an impact on the two currencies' relative values.

Factors that affect the value of the US dollar and the Japanese yen in respect to each other or to other currencies have an impact on the USD/JPY currency pair As a result, the interest rate differential between the Federal Reserve (FED) and the Bank of Japan (BoJ) influences the relative value of the two currencies Because the US dollar is already higher against the Japanese yen, if the Fed's market intervention leads the US currency to appreciate, the value of the USD/JPY cross rate will rise

Despite the fact that the Japanese economy is confronted with severe challenges in the twenty-first century, the yen remains a safe haven currency When the market is moving, investors will rush to the Japanese yen, which will cause it to gain It traded as high as 120 yen in 2007 and as low as 90 yen in 2009, as the Great Recession revealed The Japanese yen, on the other hand, begins to decline when the global economy is booming and the

stock market is growing Following the Great Recession, the Japanese yen gradually lost value against the US dollar as the global economy recovered When the Bank of Japan conducted large-scale quantitative easing in 2013, the drop was accelerated In 2018, the Japanese yen (JPY) was the main foreign currency that appreciated the most against the

US dollar Global investors have actively acquired the JPY as a safe haven for assets in the face of a potentially unpredictable economic, trade, and political situation over the previous year Despite the fact that the GBP and Euro are facing several issues as a result of Brexit and Italy's budget crisis, the JPY has climbed dramatically as a result Furthermore, the US-China trade war, as well as the significant decline in oil prices, have put pressure on the currencies of strong exporting countries, such as the Canadian dollar At the end of 2018, the JPY had grown by more than 2.5 percent, and the USD/JPY exchange rate had reached 109.88 Furthermore, in the third quarter of 2018, the JPY's proportion of global foreign exchange reserves grew to 5%, the highest level in 16 years

Chart 3 US/JP 10-year Bond Yield Spread vs USD/Yen

Source: Macromicro

In 2021, the JPY will fall against the USD due to the yield differential between US and Japanese government bonds The link between the USD/JPY rate and the yield spread

on large bonds is illustrated in the graph above The yield on a 10-year Japanese government bond (JGB) issued by the US government (UST) has climbed to +0.92 (the highest is 1), compared to historical data of +0.5 and +0.6 in 2020 This means the USD/JPY will continue to increase if the UST rises above the JGB

Chart 4 Japan 10Y Bond Yield (percent)

Source: Tradingeconomics

To help the economy prepare for the future, the Bank of Japan purchased additional assets worth JPY12 trillion and JPY180 billion, respectively, including government bonds, ETFs, and REITs (Real Estate Investment Trusts), and some more commercial paper and corporate bonds with a limit of JPY 7.5 trillion each until the end of March 2021 As of

November 2020, the Bank of Japan owned 45.1 trillion yen in Japan through a ETF On December 8, 2020, the Japanese government passed a package of relief measures called

"Comprehensive Economic Measures to Secure People's Lives and Living Standards Toward Relief and Hope." The budget agreement is valued at 73.6 trillion yen

2.2.3 Inflationary pressures in Japan and the United States are explored

The fact that Japan is facing deflation while the US has a booming inflation index is one factor influencing the USD/JPY pair.

Chart 5 Asset holding

The Bank of Japan's and the Federal Reserve's monetary policies have been diverging since 2013-14, as shown in Chart 7 The Federal Reserve boosts short-term interest rates, while the Bank of Japan expands its asset holdings The Federal Reserve's balance sheet dropped as a proportion of GDP after ending quantitative easing (QE3) in 2014 The continuing policy divide emphasizes the economic disparity between the two nations The BoJ's wealth accumulation accelerated in 2013, following Shinzo Abe's election as Prime Minister, in contrast to the Fed's accommodation cuts in 2013-14

To enhance inflation expectations, the government and the Bank of Japan jointly announced on January 22, 2013, that the BoJ will commence additional asset purchases and double its inflation target from 1% to 2% The Bank of Japan strengthened these steps

in January 2016 by establishing a system of negative deposit rates on some reserves held