Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to

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If the Japanese bank is offering a higher interest rate than the U.S. banks, then investors will want to invest in Japan, creating a higher demand for yen. This increased demand for yen will cause the yen to appreciate relative to the U.S. dollar, making the dollar weaker. Therefore, people must expect the yen to appreciate by 2 percent, which is the difference between the interest rates offered by the Japanese and U.S. banks.

Suppose a Japanese Bank Offers a 4 Percent Interest Rate