[Summary]
An exchange rate is not merely a conversion ratio between two currencies.
It is the result of the global market continuously pricing the economic strength, fiscal condition, interest rates, growth expectations, and institutional credibility of the country issuing that currency.
When the yen weakens, it is not always a simple vote of no confidence in Japan. It means the market is reflecting relative changes in Japan's economic conditions into price.
At the same time, the state does not simply watch foreign exchange price formation from the sidelines. In Japan, the Ministry of Finance decides whether to intervene in the foreign exchange market, and the Bank of Japan conducts the operations as the agent of the Minister of Finance. The state has taxation power, legislative power, and the authority to maintain the currency system.
This chapter reads the exchange rate, the price of the yen, as a price formed by mutual constraints between state sovereignty and the economic rationality of borderless markets.
This article is a general explanation of foreign exchange markets and economic structure. It does not recommend FX trading, foreign currency deposits, foreign-currency assets, or any specific currency position. Exchange rates can fluctuate sharply due to interest rates, inflation, monetary policy, the balance of payments, geopolitics, supply and demand, and speculative trading. Principal losses and foreign exchange losses may occur.
New Price Formation Theory Series
We live surrounded by many prices: stock prices, hourly wages, interest rates, foreign exchange, and the value of data.
Who decides them, and under what rules?
This series reads modern capitalism through the question of who controls the rules of price formation.
- New Price Formation Theory | Who Decides Prices?
- New Price Formation Theory | Capital Markets: Who Decides Stock Prices?
- New Price Formation Theory | Labor Markets: Who Decides Wages?
- New Price Formation Theory | Financial Markets: Who Decides the Price of Money?
- New Price Formation Theory | Foreign Exchange Markets: Who Decides the Price of the Yen? (this article)
- New Price Formation Theory | Data Markets: Who Decides the Price of Data?
Foreign Exchange Is the Shock Absorber for Interest-Rate Distortions
When we hold a 10,000 yen bill in Japan, we rarely doubt that it is worth 10,000 yen.
But once that piece of paper crosses Japan's border and enters the global foreign exchange market, its absoluteness disappears.
What remains is a cold assessment: how credible is the economic environment behind the state that issues this currency?
Sharp moves in dollar-yen affect import prices, corporate earnings, household budgets, investment decisions, and debates over how to defend living standards. So who decides this enormous price called the price of the yen, or the exchange rate?
In the previous chapter, we saw how the institution called the central bank and the market called global capital compete over interest rates, the backbone of almost every price.
The foreign exchange market is the shock absorber for interest-rate differentials, capital flows, inflation gaps, trade balances, and policy expectations.
What appears there is a major power struggle in modern capitalism: the state trying to defend monetary sovereignty, and a borderless market that trades the state itself as an object of valuation.
1. Foreign Exchange Is The Present Value Of The State
Why does foreign exchange price the credibility of a state?
An exchange rate is not simply a ratio between two currencies. Its essence is the present value of the state: a real-time numerical expression of the issuing country's economic strength, fiscal soundness, and probability of future growth.
In the capital markets chapter, we argued that a stock price is a price placed on a company's future survival probability. The foreign exchange market is close to an enormous exchange where the object being priced is the state.
| Conditions that support a currency | Conditions that weaken a currency |
|---|---|
| Strong growth expectations | Weak growth expectations |
| Relatively high interest rates | Relatively low interest rates |
| Trust in fiscal and institutional stability | Concern over fiscal or institutional stability |
| Current account support and capital inflows | Capital outflows or heavy import burden |
Global capital compares and prices countries around the clock.
When we hear that the yen is weakening, we are watching the market, a massive auditor, reflect relative changes in Japan's economic conditions into price.
The important point is not to reduce yen weakness to a moral judgment on Japan.
Foreign exchange is always a relative price. If the dollar is strong, the yen can look weak. If U.S. rates remain high, the yen becomes easier to sell. Overseas investment by Japanese companies, energy imports, trade balances, and investor risk appetite also matter.
The market is not grading countries morally. It compresses interest-rate differentials, growth, inflation, capital movement, and trust in policy into a single exchange ratio.
2. State Intervention as an Attempt at Effective Control
Of course, states and central banks do not simply allow their currency values to move one-sidedly according to market positioning.
This is where a fierce struggle over price-setting power appears in foreign exchange.
One of the state's strongest tools is foreign exchange intervention.
When sharp yen weakness or yen strength risks damaging households and the economy, Japan's Ministry of Finance decides whether to intervene, and the Bank of Japan conducts the practical operations as the Minister of Finance's agent.
In the case of a response to rapid yen weakness, the government sells dollars and buys yen in the market. It uses foreign reserves and institutional authority to act directly on the price set by the market.
This is also a display of sovereignty.
In ordinary liberal economies, there are strong limits on direct government control of specific product prices. But in foreign exchange, excessive currency volatility can shake the economic infrastructure itself, so the state can enter the market as a massive player.
The state sends a signal that it too can move prices.
Because the state can change laws, collect taxes, and maintain the currency system itself, intervention is not merely another trade order. Its institutional weight can become a powerful restraint on the market.
3. A Daily Market of About $9.5 Trillion Creates Mutual Constraint
Yet in modern global capitalism, state power cannot make the market kneel completely.
According to the BIS 2025 Triennial Survey, global foreign exchange turnover reached about $9.5 trillion per day on average in April 2025.
Against that, even very large intervention by one country is limited compared with the total liquidity of the global market.
The state's direct financial power is strong. But the depth of the global foreign exchange market is even larger.
As discussed in the interest-rate chapter, if a central bank maintains low rates for domestic economic conditions or debt burdens, global capital moves according to the rationality of interest-rate differentials. More capital sells yen and moves toward dollars or other currencies in search of higher yields.
Even if the state warns that a move is speculative and builds a breakwater through currency intervention, the market will test the limits of that breakwater if the underlying fundamentals and interest-rate differential do not change.
The foreign exchange market is not a place where the state simply dominates the market. Nor is it a place where the market fully defeats the state.
It is an endless ring in which state sovereignty and market rationality constantly constrain each other.
If state policy ignores market distortions, the market forces policy adjustment through sharp exchange-rate moves. If the market leans too far into short-term speculation, the state responds through intervention, regulation, diplomacy, and monetary policy.
Neither side wins completely.
What exists here is a dynamic equilibrium produced by the collision between sovereignty and market rationality.
Conclusion: Who Holds Pricing Power Over the Yen?
Who decides the price of the yen, or the exchange rate?
The answer is the dynamic equilibrium itself: the constant pushing of a boundary between the sovereign power displayed by the state and the economic rationality demanded by borderless capital.
The foreign exchange market is the place where prices previously discussed within domestic institutions, corporations, labor, and finance, are first priced at the largest layer: the credibility of the state itself.
Stock prices, wages, interest rates, and foreign exchange.
Across these four chapters, the price formation rules of the old world connect into one line.
| Chapter | Price | Main price-formation structure |
|---|---|---|
| 1 | Stock prices | The market prices future expectations |
| 2 | Wages | The state secures healthy competition rules |
| 3 | Interest rates | The central bank intervenes in the price of money and competes with the market |
| 4 | Foreign exchange | Markets and states constrain every distortion through sovereignty and rationality |
Our view has expanded from companies to labor markets, financial markets, and the state.
We have reached the limit point of the physical economic institutions on which traditional capitalism has relied.
But the struggle over price-setting power does not end here. If anything, the truly unknown territory begins now.
So far, the story has taken place inside traditional institutions: the state, the central bank, and national borders.
Next, the series moves into a frontier where those assumptions begin to loosen.
Data is a new form of wealth overflowing in a digital space without borders, central banks, or even clear nationality.
Who decides the price of this intangible asset called the oil of the 21st century, and under what rules?
We now step into the new world of price formation.
Next: Data Markets
The next chapter examines price formation for data in a borderless digital space.
Browsing histories, purchase histories, location data, search queries, and training data for generative AI: why do they have value, and who holds the pricing power over them?
Sources
- BIS, "Triennial Central Bank Survey 2025: Foreign Exchange Turnover"
- BIS Data Portal, "Triennial Survey Tables And Dashboards"
- Bank of Japan, "What Is Foreign Exchange Intervention? Who Decides And Who Conducts It?"
- Bank of Japan, "Overview Of Foreign Exchange Equalization Operations"
- Ministry of Finance Japan, "Foreign Exchange Intervention Operations"
- This site, "New Price Formation Theory | Financial Markets: Who Decides the Price of Money?"
- Checked on: 2026-06-02