We right now learning about the huge earthquake that has struck off the coast of Japan, and that the resulting Tsunami is causing vast damage to the north east coast regions of Japan.

The Japanese currency – the Yen, has dropped sharply on news of the earthquake.  Why is this?

Many investors around the world who hold Japanese investments are clearly scared about what the impact the earthquake and the Tsunami will have on the Japanese economy.  So as these investors sell these investments and withdraw their money away from the Japanese economy, they sell the Yen (Japanese currency) and purchase their own currency e.g. the US Dollar or the Australian Dollar.  The result of this is that the Yen drops in value relative to these other currencies.

The drop in the Yen may well be a knee jerk reaction.  If investors over the coming days and weeks form the opinion that the damage to the Japanese economy was not as bad as first feared, investors will re-invest in Japanese assets and that will require them to purchase Japanese Yen, and a rise in that currency will result.