The USD/JPY decline is mainly due to the current account deficit of the US economy, the upward trend in oil prices and the pegging of the Chinese Yuan with some of the major currencies. The tough stand taken by the Bush administration narrowed the budget deficit; yet, the future is bleak for the US dollar as it may continue to be weak in the year 2005 also.

The disparity between a country's aggregate consumption and its national production results either in a trade deficit or surplus. A nation that incurs a trade deficit does not earn an adequate amount to pay for all its imports, nor does it have any savings to finance its investments. Persistent trade deficits then lead to an accumulation of foreign debt on which interest has to be paid. To make the interest payments, the borrowing country has to export more and import less. This necessitates its national currency to plunge in value. In the backdrop of this scenario is the decline in the dollar, beneficial to the Japanese yen?

The decline of the US dollar and the Japanese yen is due to the persistent current account deficit growth. The only remedy provided to correct this imbalance in the US trade balance deficit is to depreciate the dollar on an incessant basis. In recent years, the current account deficit of the US economy has been around 6% of its GDP and the difference between the US trade balance deficit and its current account surplus is approaching to zero. To correct this adverse situation, the US economy has to reduce the expenditure on imports and generate revenue by increasing exports. Based on the latest Treasury International Fund (TIC) data, there was hardly sufficient incursion of foreign capital to cover the trade imbalance. In reality, the deficit in the month of August, 2004 was $54 bn, whereas the total purchases of US securities tapered to $58.96 bn from $63.1 bn in July, 2004. Consequently, the capital account surplus in August was hardly big enough to wrap the mounting trade deficit. On the one hand, foreign holdings of US treasuries decreased by 34%, while on the other, Japanese demand bounced back considerably.

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