APPLYING ECONOMIC MODELS TO INTERPRET THE EXCHANGE RATE MOVEMENT OF THE JAPANESE YEN TO THE AMERICAN DOLLAR
This paper will discuss the exchange rate movement of the Japanese Yen to the American dollar using three popular exchange rate models: 1) the Purchasing Power Parity (PPP); 2) the Current Account Model (CAM); and 3) the Portfolio Balance Model (PBM). These three models will be discussed after a brief introduction that will establish the groundwork for the investigation.
Historical Evaluation of the Yen/Dollar Relationship
Hedging and arbitrage to achieve exchange rate maximization are primarily functions of capitalistic economies. Since both the United States and Japan are "capitalist" countries (although each adheres to a different philosophy of capitalism) a study of the relationship between the Japanese Yen and the American Dollar can be an instructive guide to the disparate nature of capitalism. The American government still adheres to the myth of free market fluctuations and flexibility as the basis of capitalism, while the Japanese believe that business and government must become allies to engender growth of Japanese companies.
World currency exchange trade is competitive and volatile, growing even more so with the trend toward computer analysis and the growing web of global networking, two trends, which have made currency ratios change on a minute-to-minute basis. "Trying to keep score in the continuing Asian financial crisis? Here's an early call: Wall Street won!. . . the collapse of one Asian financial system after another in recent months has dumped a truckload of dirt on the grave. The American economy may have some shortcomings, but it is
doing far better than the alternatives,"(Murray, 1997,A1).
The "win" that Murray is referring to is the fact that the Yen/Dollar relationship has reached such a low point that many multi national corporations that trade in the FX market have been for...