My fundamental understanding of markets is often quite non-existent-- according to this article, Japan and the G7 central banks are buying dollars to weaken the yen, with the yen being strong over the last week. My question-- why is the Yen stronger if Japan was just hit by a huge catastrophe?
The Japanese have been running export surpluses over the last decades. The $$ from the surplus have been invested overseas. The US Treasury Deparment issues monthly figures on foreign holders of treasury securities, which can be found here:
As you can see, Japan is the second foreign investor in US government securities and held around $ 886 billion in the end of January 2011. Expectations are that Japanese will repatriate part of their holdings and purchase Japanese yen to cope with the current situation. The repatriation will create an increased demand for Japanese Yen. This has been anticipated by speculators.
The Carry Trade
This involves borrowing cheap Japanese Yen and investing overseas, where interest rates are higher. The interest rate differential can be pocketed as a profit. A rising Yen is not nice for carry traders, so the expectation that the Yen may rise drives the carry trades to repay their Japanese borrowings. This also leads them to purchase Yen, so by rushing to the exits they also drive the Yen higher.
The second occurence is an example of positive feedback, which is induced by the first.
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