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Question about exchange rates

 
 
Reply Fri 14 Feb, 2020 05:08 pm
Hi! My question is :
When a country decides to intervene in its currency market, it can often decide to buy foreign currency (just like Japan did when they decided to stop the appreciation of the Yen). Why is it that buying foreign reserves depreciates your local currency? The way I see it, since Japan is selling its Yen, there is less Yen available and should thus be worth more.
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Type: Question • Score: 1 • Views: 351 • Replies: 1
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financeqc
 
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Reply Wed 8 Jul, 2020 07:44 am
@mcgillram,
When Japanese central bank starts buying foreign reserves, they will add more Japanese Yen into the market. More supply of JPY will drive the Yen to depreciate against other currencies.
Conversely, if Japan central bank starts selling foreign reserves, they will withdraw JPY out of the market. JPY supply will be reduced, it will then drive the Yen to appreciate against other currencies.
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