Japan rides the yen roller coasterHeadquartered in Tokyo, Japan, Bridgestone is the world's largest tire manufacturer. A 2013 headline in the Wall Street Journal read: "Weak Yen Boosts Bridgestone Earnings." The headline was not unusual. Many large Japanese companies, including Toyota, Sony, and Nintendo, rely heavily on sales in the United States and other foreign countries. As a result, your earnings depend on the exchange rate between the yen and other currencies. As the figure below shows, the long-term trend has been for the yen to gain value against the dollar. The value of the yen rose from 360 = $1 in 1971 to less than 100 = $1 in 2013. However, there have been substantial swings in the exchange rate around that long-term trend. For example, the value of the dollar soared against the yen by more than 70% between 1995 and 1998. Between 2007 and 2011, the value of the dollar fell by 60% against the yen, before rising by 25% between 2012 and 2013. As a result of these exchange rate movements, the late 1990s and 2012-2013 were good years for Japanese exporters, while 2007-2011 were bad years. What explains these fluctuations in the yen-dollar exchange rate? We have just seen that an increase in demand for US financial assets by foreign investors can increase the value of the dollar, and a decrease in demand for US financial assets can decrease the value of the dollar. The rise in the value of the dollar against the yen in the late 1990s was fueled by strong demand for US stocks and bonds by Japanese and foreign investors, particularly US Treasury securities. This increase in demand was not primarily due to higher US interest rates, but rather to problems in the international financial system that we will discuss in Chapter 19. Many investors viewed US financial assets as a safe haven in times of financial trouble because they believed the US Treasury was unlikely to default on its bonds. The decline in the value of the dollar against the yen in the years after 2007 began when the Fed began cutting the federal funds rate target in response to the start of the 2007-2009 recession. When US interest rates are low, investors are likely to buy Japanese and foreign stocks and bonds instead of US stocks and bonds, depressing the demand for dollars and lowering the value of the dollar exchange rate. By 2011, Bridgestone and other Japanese firms were complaining of losses due to the high value of the yen. Some Japanese manufacturers considered moving more of their production capacity out of Japan. Nissan's CEO stated, "What's happening now is that a lot of projects are basing their manufacturing outside of Japan because they just can't survive on this 77 yen to the dollar." The drop in the value of the yen after 2012 occurred as a result of the Japanese central bank, the Bank of Japan, following an expansionary monetary policy. When Shinzo Abe was elected prime minister in late 2012, he appointed a new Bank of Japan governor who promised to double the Bank's holdings in Japanese government bonds and buy other assets. Investors expected that the result would be lower nominal Japanese interest rates and a higher rate of inflation, which would reduce the real return on holding Japanese financial assets. In response, investors sold Japanese financial assets and bought American financial assets, causing the value of the yen to fall against the dollar. The falling value of the yen was good news for Japanese companies, but fluctuations in the yen/dollar exchange rate are certain to continue as investors buy and sell currencies in response to changes in monetary policy and other factors. Questions An article in The Economist notes that gasoline prices in Japan were rising "due to government efforts to lower the yen." a. Why was the Japanese government trying to reduce the yen? Response: b. What actions did the Japanese government take to reduce the yen? Response: C. Why would the yen's decline have increased gasoline prices in Japan? Response