Over the past year, the Japanese Yen (JPY) has experienced severe downward pressure, reaching multi-decade lows against the US Dollar (USD). This depreciation has been primarily driven by a widening interest rate differential, as the Bank of Japan maintained its ultra-loose monetary policy while other major central banks aggressively raised interest rates to combat inflation.
For an economy heavily reliant on imports for raw materials, a weaker currency presents significant challenges. The depreciation has dramatically inflated the domestic cost of essential imports such as liquefied natural gas (LNG), crude oil, and agricultural products, which are priced globally in USD. This has translated into rising wholesale and retail prices across Japan. At the same time, major Japanese exporters, particularly in the automotive and precision machinery sectors, have experienced a substantial boost in international price competitiveness, leading to stronger export demand.
Using the information in Extract G and an appropriate macroeconomic diagram, explain why a fall in the exchange rate of a currency is likely to increase inflation.
310 exam-style questions on AQA A Level Economics 2.6 The international economy (A-level only), covering 2.6.1 Globalisation, 2.6.2 Trade, 2.6.3 The balance of payments, 2.6.4 Exchange rate systems, and 2.6.5 Economic growth and development. Each one has a worked solution and a mark scheme showing where the marks go.