How does changing the interest rate impact the currency value, and are there things that Japan can do to raise the value of the yen regardless of what the rest of the world is doing?

Question

Used to be 100 yen to a dollar. Now it’s 150, but recently there was a 0.25% change to the interest rate and it brought it down ever so slightly to about 149. Are there no other alternatives? Are there down sides to doing this? Does the large amount of tourism in Japan have an impact on this?

In: Economics

Answer 1

When interest rates go up, people want to deposit money in your banks (and other such investments), so they want your currency. They start trading their other-country currency for yours. As a result, the value if your currency on the market goes up.