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The forces fueling the yen’s rises and falls

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KYOTO - President Donald Trump’s announcement May 5 that the United States will impose additional tariffs on Chinese goods has killed the optimism that had begun to emerge over the U.S.-China trade talks, causing them to take a turn for the worse. With the subsequent imposition of the additional tariffs, pessimism prevailed over the course of the world economy and stock markets worldwide, including in the U.S. and China, plummeted.

As of May 14, the Nikkei 225 average had declined 7.2 percent from its April high. The yen also went up from the 112-113 range to the dollar in April to 109-110. It was not the first time that stock market declines have caused the yen to rise. As indicated in the accompanying chart, since 2004 there has been a strong tendency that a stock market fall in Japan leads to a stronger yen, while a surge in share prices leads to the yen’s fall. Why is this?

Selling and buying by foreign investors plays a key role when Japanese share prices trend sharply in one direction or the other. When Abenomics began pushing up share prices in 2013, the net purchase of Japanese stocks by foreign investors amounted to ¥14.7 trillion, while the yen declined sharply against the dollar.

When foreign investors, who hold their funds mainly in dollars, buy Japanese stocks, one might expect that the yen would appreciate since they sell the dollar to buy the yen. Likewise, when they sell Japanese stocks, one might expect the yen to depreciate since they sell the yen for the dollar. But the exchange rates move in opposite directions. Let me........

© The Japan Times