In 2011 japan was hit by a powerful earthquake using the tools that you have learnt from this course,describe a) how the japanese yen moves(depriciation or appreciation against australian dollar) and why; and what japanese central bank can do to handle this crisis?
Macroeconomics of Open Economies
The earthquake of 2011 has been one of the biggest natural disasters in Japan in many years. The earthquake has disrupted and has led to a loss of many lives in the affected areas. Here, we look at how the currency exchange rates with respect to the yen will be affected by the earthquake. During the 1995 earthquake, everybody thought that the yen along with the stock markets would crash and the dollar would rise and become stronger. But what happened actually surprised even the most mature of investors and currency market experts. Due to the earthquake, almost all the investors in japan who had invested their funds in foreign overseas market began calling back their funds. This led to a lot of selling of funds which were held by Japanese investors around the world. This money in the foreign currency then was converted into the Japanese to bring it into Japan. This led to a heavy demand of Japanese yen in the market as against the dollar and other currencies. This increase in demand, as per the economic law of demand and supply naturally led to the strengthening of the yen and the yen rose against all the foreign currencies even as the stock markets in Japan tanked. The above wave of Japanese yen led to a rise in investing in the Japanese government bonds and led to a rally in the same. Along with that, there was a general switching to quality over quantity as Japanese investors started preferring more stable and quality investments in Japan as opposed to more risky investments elsewhere. This made the financial market in Japan stronger due to the rise in demand of the Japanese Yen and the increase of people going over to quality investment over high risk high return junk investments.