Why is the Japanese Yen almost worthless in comparison to the dollar, even though Japan is the3rd largest global economy?

Question

Why is the Japanese Yen almost worthless in comparison to the dollar, even though Japan is the3rd largest global economy?

In: Economics

Answer 1

Say you have a cake and I have a cake. Each cake represents the size of our economies and they are equal.

I decide to cut my cake into 4 pieces, you decide to cut yours into 16. Our economies haven’t changed and you are neither richer nor poorer.

Nevertheless, if we decide to exchange slices, I will expect 4 slices of your cake in return for one of mine. That is only fair since your slices are smaller. This is the exchange rate. It says nothing about who has the biggest cake or best economy. It just shows that one of your slices is a smaller proportion of your overall economy than mine is of my economy.

So it is with Japan and the USA. The Yen appears to be “worthless” simply because it is a much smaller slice of Japan’s economy than the dollar is of the US’s.