Explain one demand-side and one supply-side factor that may lead to a depreciation of a country's currency.
The Japanese yen experienced a sharp decline in value in 2022. Analysts suggest this was driven by global economic instability and increasing prices of commodities worldwide.
a. Explain one demand-side and one supply-side factor that may lead to a depreciation of a country's currency. [10]
Introduction
The depreciation of a country’s currency can be influenced by both demand-side and supply-side factors in the foreign exchange market. A depreciation occurs when the value of a currency falls relative to another, meaning more units of the depreciating currency are required to buy the same amount of foreign currency. In the case of the Japanese yen’s significant depreciation in 2022, commentators have pointed to global economic uncertainties and rising global commodities prices as key contributing factors.
Global economic uncertainties
One demand-side factor that can cause a currency to depreciate is global economic uncertainty. When global uncertainties rise, such as during periods of political instability, economic recession, or geopolitical tensions, both consumers and firms become more cautious about spending and investing. This often leads to a reduction in demand for exports from countries like Japan. Since foreign consumers and firms need to buy Japanese yen to purchase Japanese exports, a fall in demand for Japanese goods leads to a decline in the demand for the yen in the foreign exchange market.
In addition, global uncertainties can discourage foreign investors from investing in Japanese assets, such as stocks, bonds, or real estate. Foreign investors would typically need to convert their home currency into Japanese yen to make these investments. If foreign investors perceive greater risk due to global uncertainties, they may choose not to invest, reducing the demand for Japanese yen.
This fall in demand for the yen shifts the demand curve for yen in the foreign exchange market leftward, from DD0 to DD1. As a result, the equilibrium price of the yen falls from P0 to P1, leading to a depreciation of the yen (shown in the diagram below).
Rising global commodities prices
On the supply side, rising global commodities prices can also lead to a depreciation of a country’s currency. Commodities such as oil, natural gas, and food are typically priced in foreign currencies, such as the U.S. dollar. When global commodities prices rise, countries like Japan, which are heavily reliant on imports for these essential goods, will need to spend more yen to purchase the same quantity of foreign goods.
Because the demand for global commodities tends to be price inelastic, Japan cannot easily reduce its consumption of these essential goods despite higher prices. Therefore, Japan would need to exchange more yen for foreign currencies to cover the increased cost of commodities. This increases the supply of yen in the foreign exchange market as Japanese firms and the government sell yen to purchase foreign currencies.
An increase in the supply of yen shifts the supply curve rightward, from SS0 to SS1. As shown in the diagram, this shift results in a fall in the price of the yen from P0 to P1, leading to a depreciation.
Conclusion
In summary, the depreciation of the Japanese yen in 2022 can be attributed to both demand-side and supply-side forces acting within the foreign exchange market. On the demand side, global economic uncertainty reduced foreign demand for Japanese exports and investments, leading to a fall in demand for the yen. On the supply side, rising global commodity prices increased Japan’s import expenditure, prompting a higher outflow of yen to purchase foreign currencies. Together, these factors placed downward pressure on the yen’s value, illustrating how external shocks and structural dependencies can significantly influence a country’s exchange rate.
📘 Micro & Macro Crashcourses — Understand, Apply, and Score
Reading a good essay is useful. But learning how to write one with clarity, structure, and strong evaluation? That’s where the grades come from.
At Economics at Tuitiongenius (ETG) — Singapore’s leading economics tuition centre — our June Crashcourses are designed to help you truly understand your content and apply it like a top scorer. Taught by Mr Eugene Toh, one of the most established H2 economics tutors in Singapore, these courses are your shortcut to clarity, confidence, and results.
🚀 Boost Your June Holidays with ETG’s Micro + Macro Intensive
Whether you're revising for Promos, playing catch-up, or gunning for your first A, this H2 economics tuition experience is packed with everything you need to finally get Economics.
✅ What’s Included:
8 Key A Level Economics Topics — Covered over 2 focused, high-impact days
Flexible Formats — Attend live onsite, via Zoom, or go at your own pace with unlimited video access
Printed Hardcopy Materials Delivered — Includes Microeconomics Express and Macroeconomics Express
Exam-Ready Techniques — Learn how to structure essays, apply examples, and avoid common pitfalls
Guided by Mr Eugene Toh — Trusted by 4,000+ JC students across Singapore
💬 “I finally understand AD-AS. This crashcourse made everything click.”
💬 “The recorded lessons were a lifesaver before Promos — and they worked.”
💡 Best Suited For:
JC1 students preparing for mid-year Promos
JC2 students needing a strong content refresh
Anyone looking for JC economics tuition or economics tuition Singapore that’s structured, strategic, and exam-focused
🔗 Secure your seat now at tuitiongenius.com/contentcc
📲 Or WhatsApp 8168 3986 — we’ll help you choose the best learning mode for your needs
Study smarter this June — and finally get Economics with ETG.