You believe that the yen’s strength should be significantly tied to the performance of the Japanese economy. In addition, you have explained the basic relationship between currency exchange rates and a country’s export/import performance in a demand/supply framework and then applied that basic theory to Japan’s case and then concluded that as a result, the yen should be weaker. Correct me if I am wrong.
What I am trying to tell you is that the basic demand/supply theory that you have studied in school is true for currencies in general. But, in the real world, it is incorrect when you try to extrapolate it to the very peculiar case of the Japanese yen because the yen’s strength is not correlated nearly as much with the performance of the Japanese economy as with the performance of the world economy, i.e. world stock markets. You have asked me how we explain the strength of the yen versus the Singapore dollar. As an example of what I mean, try plotting the daily STI index price versus the value of 100 yen in Singapore dollars. If you are lazy, look at the chart of the STI index and then look at the chart of the exchange rate at a finance website.
For this reason, the REASONS you have cited – weak demand for Japanese exports and a weak economy - for why the yen should weaken in the future is incorrect. However, your conclusion that the yen should weaken sometime in the future is correct even though your reasoning is not.
Why? If you don’t know the answer to this, you have not understood what I have written above. The answer is written right at the end of this post in brackets in case what I have written is a little too heavy to digest. Try to think of it before scrolling down.
I will not get into the reason of why the yen is more correlated with stock markets than the Japanese economy as that might be a bit too complex for discussion in this thread.
I declined to provide a proper explanation for the yen’s strength in my previous post because I know from past experience that people do not like it when someone tells them something different from what they believe to be true irregardless of what they believe is correct or not.
But anyway, there you are. My two cents. I hope this makes more sense.
(because in the future, the world economy and therefore world stock markets will eventually recover as they always do in the long-run)
