currencyBoth Switzerland and Japan have recently intervened to reduce the value of their currencies after reaching record highs. How do these countries decide when and how to reduce the value of their currencies?
As all countries both import and export goods, keeping the value of the currency at a stable level is important. If the currency becomes more valuable, importing goods becomes cheaper, people earning the currency tend to go to other countries to shop, and on the other hand, exports are less competitive in the global market and the country gets fewer tourists. If the currency looses its value, the opposite happens - importing is more expensive, people visit the country more readily to both shop and tour, and exports are more competitive due to their lower price.
If your currency changes its value by a small amount, not much happens, but when the change is big, country’s economy may get unstable. People that rely on import, export and tourism have to adjust their prices, which sometimes can make their business unprofitable, and make them close down. Thus countries have to rely on economy experts to tell them when the intervention is needed to stabilize the economy.
If the currency has too much value, the country can increase the amount of currency in circulation, for example by buying foreign currencies. If its value is too small, the country can sell foreign currencies it holds.
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