In the past, Japanese GDP (Gross Domestic Product) of over $4.3 trillion (2006) makes it the country with the second largest economy in the world. The economy of Japan also enjoys one of the largest volume of exports.
A big portion of the GDP is contributed by the export of cars and electronics, which represent the major drivers of the economic growth.
Japan enjoys a persistent trade surplus. This has resulted in the high need of the JPY and its subsequent increase in value. This has not even been disturbed by serious structural deficiencies that have been experienced.
In order to sustain the large manufacturing for the exported goods, Japan has to import large amounts of raw materials, which turns the country into one of the largest importers. The US and China represent the major trade partners of Japan both regarding imports and exports.
In recent years the increased importance of China as a trade partner has been observed due to the inexpensive goods that the country produces. This has resulted in the acquisition of China of a big portion of the Japanese import market.
Investors that searched for investment opportunities in Asia viewed Japan as one of the most attractive destinations in the 1980s. This was caused by the highly developed capital market of the country and the strength of the banking system.
Inflation rates were near the zero level and Japan experienced above-trend economic growth. This led to a steep increase in expectations and a rapid growth in asset prices and credit expansion. As a result an asset bubble was formed.
However, this asset bubble burst and the real estate prices declined with a significant percentage. This was destructive to the national output.
The fall in the prices of assets led to the eventual banking crisis experienced in Japan in the early 1990s.
1997 saw the collapse of a number of financial institutions, which before this enjoyed high efficiency. Their failure was caused by the fact that they have lent money to some of the real estate developers during the bubble, with the land being the collateral for the loans.
The banking crisis and the collapse of some of the banks had a deep impact not only on the Japanese economy, but also it was felt in the global arena.
Two decades of bad economy performance resulted from the falling stock prices, the destructed real estate sector and the large bad debt that was experienced.
The negative effects of the bank crisis are still felt today. Non-performing loans have not decreased but instead are still growing. Under the conditions of deflation, which is experienced currently, the outstanding debt of the banks increases each month.
In order to cure the ailing banking system the Japanese Ministry has embarked on the injection of capital in order to avoid the further bankruptcy of additional banks.
Thus, the banking system heavily depends on the financial assistance of the government. This increases the susceptibility of the JPY to any announcements made by government officials.
