As the profitability of Japanese assets rises relative to the profitability of Australian assets, Australian residents will make additional investments in Japan; this results in an increased demand for yen and a depreciation of the dollar under a system of floating exchange rates.

Question

Quizplus · Accepted Answer

When the profitability of Japanese assets increases relative to Australian assets, Australian investors are incentivized to invest more in Japan. This leads to an increased demand for yen (as Australians convert their dollars to yen to invest), which under a floating exchange rate system, causes the Australian dollar to depreciate relative to the yen.

As the Profitability of Japanese Assets Rises Relative to the Profitability