Question

Assume that indicators of improved economic conditions in Japan prompt overseas investors to begin lending to the Japanese government and enterprises. What impact would this have on the yen market? How should Japan's central bank, the Bank of Japan, react to this occurrence in order to maintain the yen's value?

Short answer

In order to maintain the yen's value the Japan's central bank and the Bank of Japan must raise yen demand in foreign exchange markets by acquiring yen with other currencies.

Step-by-step solution

 introduction

A. Thecost of the yenmight fall ifdistant places traders resume financing to the Japaneseauthorities and businesses

 If the Central Bank and the Bank of Japan want to prevent the yen from weakening:

b. If the Central Bank and the Bank of Japan want to prevent the yen from weakening, they must raise yen demand in foreign exchange markets by acquiring yen with other currencies. This can be accomplished by utilising the Central Bank's foreign exchange reserves.