Question

1. The following questions concern the supply and demand for Japanese yen. The exchange rate is denoted as E_$/Yen. For each question state whether the supply of yen, demand for yen or both curves will shift, and in which direction.

a The U.S. raises tariffs on imports of Japanese steel

b Large numbers of Japanese baseball fans visit the U.S. to watch Shohei Ohtani, a Japanese baseball player for the California Angels.

c International investors become worried about the safety of Japanese bonds because of Japan’s high debt to GDP ratio.

Answer 1

(a) Higher tariff of imported Japanese steel will decrease US demand for Japan's steel imports. This will decrease the demand for Yen, shifting the Yen demand curve leftward (decreasing exchange rate, depreciating Yen).

(b) Japanese tourists visiting US will increase the demand for dollar, and the tourists will convert Yen to dollar by selling Yen and buying Dollar. The supply curve for Yen will shift rightward (decreasing exchange rate, depreciating Yen).

(c) Global investors being concerned about Japan's bonds will decrease global demand for Japanese bonds. These investors will sell Japanese bonds, which will decrease the demand for Yen, shifting its demand curve leftward, and will increase the supply of Yen, shifting the supply curve rightward (decreasing exchange rate, depreciating Yen).