The paper “ Japan’ s Earthquake and Economic Impacts” is a breathtaking variant of the assignment on macro & microeconomics. The massive earthquake in Japan caused the yen to appreciate against the Australian dollar. The Australian dollar dropped by 0.8 percent to 82.32 yen on 11th March 2011. There was also an earlier appreciation of the yen when the Australian dollar traded at 81.47 yen. This was the lowest exchange rate between the two currencies since 1st January 2011 (Yui, & Swift, 2011 pg. 1). This is due to the rush by many investors and the Japanese government to try and contain losses caused by the earthquake.
The high yielding assets in Australia are therefore being sold by those with investments in Japan since they are opting to divert their investment fund to help in the reconstruction of the destroyed projects. An increase in demand of the Japanese yen leads to shifting to the foreign exchange demand curve to the right. This translates to an increase in the exchange rate between the Australian dollar and Japanese yen. The expectations of speculators in the foreign exchange market exercise risk aversion in order to maximize their profit.
They expect persons in Japan to liquidate investments in Australia for Japanese yen which is obviously highly demanded in Japan for both consumption and expenditures in form of reconstruction of damages that arose from the earthquake and the tsunami which followed immediately. The speculators hold their yen as they wait to sell it in a future date for higher prices than those in the current spot market. They may also sell it today but at a premium which will act as the opportunity cost of their expected future benefits in trading the yen (Yui, & Swift, 2011 pg.
1). After the 1995 Kobe earthquake, Japan increased its investment in the insurance industry in a bid to mitigate such losses if they recurred. They increased purchase in foreign reinsurance since local insurance companies could not handle the increased demand in earthquake insurance covers. After these crises, it is expected that most foreign reinsurance will demand more yen to pay up the huge claims expected from Japan. This means that speculators have more reason to hold their Yen holding in expectations of much higher demands of the yen.
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Yui, M. & Swift, R, 2011, Australian, New Zealand Dollars Fall on Japan Earthquake, Reactor Concern, Retrieved on 29th April, 2011, http://www.bloomberg.com/news/2011-03-13/aussie-drops-to-six-week-low-versus-yen-as-japan-quake-saps-risk-appetite.html