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President Donald Trump’s announcement May 5 that the United States will impose additional tariffs on Chinese goods has killed the optimism that had begun to emerge over the U.S.-China trade talks, causing them to take a turn for the worse. With the subsequent imposition of the additional tariffs, pessimism prevailed over the course of the world economy and stock markets worldwide, including in the U.S. and China, plummeted.

As of May 14, the Nikkei 225 average had declined 7.2 percent from its April high. The yen also went up from the 112-113 range to the dollar in April to 109-110. It was not the first time that stock market declines have caused the yen to rise. As indicated in the accompanying chart, since 2004 there has been a strong tendency that a stock market fall in Japan leads to a stronger yen, while a surge in share prices leads to the yen’s fall. Why is this?

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