The Determinants of the Japanese Exchange Rate and the Resulting Implications for Investors

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Lux, Kai
thesis / dissertation description
Despite an ongoing accommodative monetary policy by the Bank of Japan (BOJ) in response to Japan’s asset price bubble burst in the early 1990’s, the Yen has experienced numerous periods of strong appreciation. In 2016 alone, the Yen sharply appreciated in early January, after the Brexit vote, and after Donald Trump’s nomination for presidency. This contradicts commonly accepted economic theories regarding monetary policy, interest rates, and money supply, which makes a clear understanding of the Yen’s movement necessary to evaluate the potential benefits and risks associated with portfolio rebalancements towards Yen-denominated investments. Thus, this paper’s main research question is: What factors explain the Japanese Yen’s abnormal, appreciative behavior, how do these impact the Yen, and what are implications for Yen-denominated investments? The answer to this question is especially relevant for investors because conventional economic theories may not apply to the Yen and investors not understanding this notion may misinterpret Japanese market data. Consequently, this paper’s results will act as a guideline for money managers interested in investing in Japan.