Market observers attribute the strengthening of the dollar against the yen to disappointment about the prospects for Japanese monetary tightening. This in turn is related to the perception that the new Japanese government is less likely to soften the existing proposals for fiscal contraction. In several industrialized countries, high levels of unemployment coexist with subdued consumer price inflation . Despite the previous depreciation of the yen, which would be expected to boost domestic prices, the 12-month Japanese inflation rate is near zero. Unexpected upward price pressure would increase the perceived likelihood of monetary tightening in any nation and thus would boost the value of its currency.
Recent indicators point to continued economic growth in Germany and Japan.
This, in combination with subdued inflation numbers, might explain the drop in German long-term interest rates . Although long-term rates fell even more in Japan, growth there may be boosted as the yen depreciation enhances net exports. French short-term rates have been allowed to fall more than those of Germany or Japan. Excluding the financial aid given to Mexico, however, growth in official development assistance slowed. Smaller increases in private flows are mainly due to declining portfolio equity investment.