How come the Japanese Yen is not close to or equal to the Dollar and Japan is a top 5 economic powerhouse?

Question

Why aren't the currencies on par?

Answer 1

The Interest Rates in Japan are being kept low and until recently the Bank of Japan has had a very loose monetary policy (meaning they can print and release money at will). This is serving to keep the value of the Yen low. In general when interest rates are low, the value of the currency is low. When more money is printed it also reduces the value of the currency. Lastly there has been a period of zero inflation in Japan for a long time. This also serves to keep the currency value from inflating.

There are many different models to predict exchange rates, and none of them are perfect, but they can be used to help understand what is going on. According to a Study done by Morgan Stanley the majority of the models showed that the Yen was under valued with the average being an undervaluation of around 15%.

You may also want to take a look at soemthing called the balance of payments and more specifically the current account.

http://en.wikipedia.org/wiki/Current_acc...

There are fields of Financial Research dedicated to this kind of study, and many of the currently accept theories actually predict the opposite of what tends to happen in real life. You may want to look at the Fisher Effect as well.

http://en.wikipedia.org/wiki/Fisher_hypo...

Answer 2

Because it takes 108 Yen to buy the same things as 1 US Dollar.

Answer 3

It doesn't work that way... You have to compare where the currency is set at in the market, compared to the cost of living...

Answer 4

Instead of comparing a Yen to a dollar in your mind, compare it to a penny. Just because the US speaks about its currency in dollars rather than pennies does not set an international standard in that other currencies should be spoken about in similar values. In other words if some country spoke of their currency in what would equal 1000 US dollars (or there abouts) would that mean anything as far as it's currency? No it is the fluctuations that mean something, and the international worth of all the country's currency available as compared to the international worth of all of another country's available currency.

Answer 5

You are confusing the exchange rate with a currency's purchasing power parity.

$1 dollar = 108 yen.   But what's the difference if a soda in a soda machine costs $1 in America and 108/Yen in Japan?