Due to the prevalence of investors unwinding their online forex carry trades, the Japanese yen appreciated 30% against a basket of currencies in 2008. Yet exports and industrial production have dropped, and Japan is currently mired in its first recession since 2001. The relative strength of the yen has actually harmed Japan in light of the fact that the rest of the world is still suffering the financial crisis.
One solution may be the so-called Tobin Tax, “a minute tax on forex transactions which will yield the revenue that can be used to counteract any major disruptive exchange rate fluctuations,” Seeking Alpha writer Lok Hang So explains. He goes on to say, “If exchange rates were determined only by current account transactions, exchange rates would never go out of line with economic fundamentals and could therefore be left to the free market. Unfortunately, these days short term capital movements easily dominate forex transactions originating from current account transactions.” Thus, the yen might be prime for the Tobin Tax right about now.