1. During the early 2000s, businesses started borrowing in Japanese yen, where interest rates were almost zero, and investing in US treasury bills, which offered an interest of almost 3 to 4 percent. As a result, Japanese investors could make good money from the interest rate difference. After 2008, due to the global financial crisis, US interest rates came down and the difference i interest rates also declined. This caused the carry trade to stop working.
2. Following the fall of interest rates in the United States, Financial institutions had to sell dollar denominated assets and buy back Japanese Yen to repay their loans. This caused an increase in demand for the yen, and thereby a rise in the value of the yen.
3. Shinzo Abe's policy to purchase government securities help to expand the supply of money, there by reducing its value. Abe's government also agreed to a higher target of inflation. The mechanism at work here was currency manipulation.
4. Yes, I think the Japanese government is engaging in currency manipulation. Other nations should come together and have bilateral talks with the Japanese government. Peaceful means should be sought in order to influence the Japanese government to avoid any kind of currency wars.
5. The japanese exporters, like the Toyota company benefit from a devaluation of the Yen. However, Japanese importers and those wishing to expand their business abroad are the ones who are hurt by the fall in the price of Yen, as this reduces their offshore purchasing power .
6. Foreign exchange markets are always susceptible to rises and falls in currency value. This may be due to disasters, financial crises or even government manipulation. Moreover, the case study also helps point out that currencies, values, prices and inflations of nations are interrelated. Changes in one country's local market policies may affect other nations too.
