Factors Influencing Exchange Rates: USD vs JPY

Market view
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MARKET VIEW 1

1. Introduction.
Wen et al (2018:p.319) said that the term exchange rate refers to the value of a given nation’s
currency as compared to another. For example the number of Japanese Yen that can make
USD. Consequently, there are various economic factors that influence the value of exchange
rate to another. The aim of this assignment is to elaborate the comparison between USD and
JPY. The assignment will identify the factors that influence exchange rates then analyze current
and future conditions of JPY and USD based on the data.
1.1 Economic factors that influence the foreign exchange rates
i. The rate of inflation
Inflation refers to rise in prices and drop in the purchasing value of currency. When it
comes to exchange rate, the country experiencing drop in inflation rate over the other
always register appreciation in the value of its currency. When a country maintains
low rate of inflation within a given period of time, its currency value will keep on to be
high.
ii. The debt from the government.
Those countries that have high foreign debt are less likely to acquire foreign capital.
Such a situation attracts high rate of inflation. The result causes a decrease in the
value of those countries.
iii. The terms of trade in a given country.
In many instances, the terms of trade are descried as ratio between the price of the
exports and the price of imports. However, the terms of trade within a country may
only rise when the export prices are higher than the import prices. When country
reaches such state it will get high amount of revenue in return hence the value of the
currency will appreciate.
iv. Recession
Recession refers to a period of time when a given county’s economy is temporary
declining. The period is always characterized by industrial activities and trade. When
a country is undergoing such a period, its interest rates always drop thus minimizing
it opportunities to get the foreign capital. Lack of the opportunity makes the currency
to weaken in comparison to a country that is accessing foreign capital.
1.2 Comparison between USD and JPY exchange rates over the year.
Date Exchange rate
MARKET VIEW 2