Market Insights

Major Currency Profile: What to Know About Japanese Yen

Japanese Yen Currency

The foreign exchange market is vast and complicated, and competition is fierce among the major banks, trading houses, and funds. Because of this, news is incorporated into the prices very quickly. Because of this, the forex market is not for beginners.

A successful forex trader must be prepared in many ways. Knowing about the impact a change in a country’s economy can have on its currency is a good place to start. The economy of a country can be broken down into many parts: its citizens’ consumption, savings, and investments; government spending; business spending; inflation; unemployment; and changes in currency exchange rates. The national bank also play’s an important role in dictating the supply of currency in circulation.

The Yen: An Introduction

Most currency trading in the forex market is conducted in seven currencies, and the Japanese yen is one of them. Japan is one of the world’s largest economies, both in terms of international trade and currency market trading. It is also one of the world’s largest exporters in terms of dollar value.

All of the major currencies in the foreign exchange market are backed by the central banks of their home nations. The Japanese yen, for example, is backed by the Bank of Japan (BoJ). Like other central banks in developed countries, Bank of Japan is mandated to act in a way that minimizes inflation while encouraging growth.

Despite this, deflation has been a looming threat in Japan for years on end. Bank of Japan has taken on a policy of considerably low rates. They hope to stimulate economic growth and demand by taking on it. There were many points in the 2010s wherein Japan's real rates leaned towards the slightly negative end of things.

The Japanese Economy: A History

One of the biggest economies in the world can be found in Japan. This has led it to rank fifth in terms of largest export volume and third in gross domestic product (GDP). The country is known for the production of automobiles, consumer electronics and technology.

The Japanese economy has had two distinct periods of growth, the first in the 1950s due to an increase in foreign direct investments and infrastructure projects in the 1960s. Japan is a member of the G8 and APEC, and is expected to be a major player in future world economic growth.

It is the Bank of Japan that controls the Japanese yen. Inflation is generally kept in check as much as they can alongside their active efforts to push growth along. Despite this, there have been low economic growth rates for the country since 1990. At that point, real estate markets and equity had crumbled.

The Japanese Economy: Modern Day

Japan has had close to 25 years of fiscal stimulus policies enacted as a result. They were all meant to kickstart the economy, leading deflation to be a constant worry area when it comes to the Yen. Japan’s central bank pursued low interest rates throughout the 2010s to boost demand for its currency, but this had little impact on economic growth. The country’s gross domestic product did not rise by more than 2.1% between 2011 and 2019.

An economic recession lasted from early 2020 to mid-2020. The COVID-19 pandemic caused the first few months of the year to be particularly hard on Japan’s manufacturing and tourism industries, which took a dive. In just the first few months of 2020, the economy shrunk by 8.2%. It fell even further in November, dropping an additional 5%. This was the fastest pace of growth on record for Japan, thanks to increased global demand for laptops and communication equipment.

Despite its size, the Japanese economy has been notably slow growing since its 1990 equity and real estate bubbles collapsed. After that, the nation's economy never reached more than 2 percent average growth per year. Inflation is another important factor: deflation has been common in Japan over the last 20 years.

Japan is one of the oldest major nations, and its current low fertility rate suggests it will have a shrinking labor force in the future. To address this, Japan recently changed its immigration policy to allow foreign workers to come into the country to provide labor in much-needed fields.

Japan is also a leading manufacturer of consumer electronics, automobiles, and technological components. Its economy has not been affected as strongly by the global recession as some other countries have been.

Japanese Yen: A History

Japanese feudal governments issued their own currencies, which meant that they were valued differently in each region. This system was removed in 1871, and then Japanese Yen – now widely known as “the yen” – were first introduced as a decimalized currency. BoJ (Bank of Japan) was established in the same year to control the money supply.

Following World War Two, the Japanese economy suffered greatly, and the Yen lost a large percentage of its value. For the sake of stability, the Japanese government set the exchange rate at 360 Yen for every US Dollar in 1953. The currency had experienced a short relationship with free market forces in 1954 and 1955, but 1971 saw all fixed currency systems abolished, resulting in a Yen that began to lose value. By 1973, the Yen was worth only 271 US Dollars.

After the Japanese property and financial markets crashed in the 1990s, the Japanese government artificially kept the value of the Yen low to remain competitive on the global stage. This worked for a few years, but in 2008, China required a valuation of their currency according to international standards, which led to several waves of deflation. The Japanese Yen was also devalued quickly in 2008.

Due to modernisation policies from the government, the Yen as we know it today was introduced in 2009. While they're still known for intervening in forex markets, they haven't actually actively done so since 2011.

How Does the Price of Yen Move?

The price of the Japanese Yen fluctuates based on a range of factors that influence the supply and demand of it, which includes economic data releases from Japan, meetings of the Japanese central bank, natural disasters in Japan, political events that affect Japan and-of course-government policies in Japan. These factors are similar to those that affect the price of the other currencies in the foreign exchange market, but some factor directly into the Yen’s price such as:

1. Carry Trades

Borrowing the Japanese Yen to buy foreign bonds has become common among investors seeking high interest rates, since the Bank of Japan keeps interest rates low. Usually, whenever markets rally, the Yen drops in value against other currencies as investors sell their Yen to buy other assets, such as stocks or commodities.

2. Currency Intervention

The Bank of Japan is the central bank of Japan and has not intervened in forex markets since 2011. This policy came about during the 2011 Japan earthquake when the tsunami caused the yen to rise to 75 per dollar. However, as the coronavirus pandemic progressed, investors turned to safe-haven assets, and the yen experienced safe-haven inflows, causing the currency to reach the 100 per dollar mark a couple of times throughout 2020.

The central bank says that if the yen reaches 100 per dollar again, it will consider stepping back into forex markets.

3. Safe-Haven Inflows

Citizens and investors may regard the Japanese yen as a safe-haven asset during uncertain economic times. For example, during the year of the COVID-19 epidemic, the Bank of Japan's quantitative easing program helped to strengthen the Japanese economy in comparison to other countries. As a result, the Japanese yen was short-term protection against economic turmoil related to COVID-19 during that period.

When safe-haven flows enter into a currency's market, demand for that currency tends to rise, consequently pushing its value upward. This usually leads to the Japanese government intervening in the market to weaken the currency's value so as to counteract protectionist measures implemented by other countries.

4. The Tankan Survey

A highly-revered report on Japanese companies that are either highly influential or have a specific minimum capital is known as The Tankan Survey. They are asked to discuss their business and economic trends, which are typically seen as a leading indicator for Japan’s gross domestic product.

Japanese Yen Currency Pairings

Unsurprisingly, some pairings with the Japanese Yen are more popular than others. Here are some of the top ones:

1. EUR/JPY

This is the forex ticker for the Euro against the Japanese Yen. It denotes how much Yen is necessary to buy a single Euro.

On the market, it ranks seventh in terms of currency pair popularity. As a whole, it makes up 3% of forex transactions globally.

Volatility is common in the pair, which provides opportunities for short-term speculators to take advantage of fluctuations. The Euro/Yen pair is most active between the hours of 1 PM and 5 PM EST, and that’s usually when it offers the most opportunities. However, it’s not always true; sometimes it’s one of the slowest times of day.

2. GBP/JPY

GBP/JPY is the currency pair for trading British pounds against Japanese yen. Common terms to refer to it include Beast, Dragon or Geppy. It stems from the extreme volatility of the pairing, which should always be approached with caution.

Trading GBP/JPY is often not advised for novices and new traders, but more experienced traders with the proper tools in place for risk management can sometimes profit from this pair. GBP/JPY has seen extremes of 150-pip daily moves, so stops should be far enough away to make sure a trade doesn’t close out before it has a chance to move in your favor.

The UK's interest rates being much higher makes the Sterling/Yen pair a frequently-used carry trade.

The best time to trade GBP/JPY is at:

1:30

2:00

8:30

10:00

EST.

It's also good to trade during the overall of European and Asian sessions, between 00:00 and 03:00 EST.

3. USD/JPY

This is the forex ticker representing the US dollar's value against the Japanese Yen. It's usually referred to with the moniker 'The Gopher.' Amongst the most traded currency pairings in the world, it comes in second, only behind EUR/USD.

The pair basically shows how much Yen is necessary to purchase a single US dollar. Take the exchange rate of 210.20 as an example. That means 210.20 JPY is necessary to buy a single unit of USD. Basically:

210.20 JYP = 1 USD

What Drives the Yen?

Many theories abound trying to define foreign exchange rates. Interest rate parity, purchasing power parity, the balance of payment models and the Fisher effect all have explanations as to what exchange rate is actually "correct." This is based on multiple factors like price levels, relative interest rates and more.

Those models don't actually work out in practice though. Market forces determine the actual exchange rates; these include supply and demand, which take into account a variety of factors related to psychology.

Japan has historically maintained a large trade surplus, at least until recently. With a large public debt and an aging population, the country has been able to raise funds domestically. However, Japanese investors have been not as willing to accept low rates of return in recent years.

  • Economic data on a major scale involves:
  • GDP release
  • Industrial production
  • Inflation
  • Retail sales
  • Trade balances

In turn, investors have to take a particularly close look at:

  • Daily news flow
  • Elections
  • Employment information
  • Interest rates (including the central bank's scheduled meetings)
  •  
  • Natural disasters
  • New government policies

Conclusion

Japan's currency is the Yen, and it has been for hundreds of years now. Its price generally moves due to a number of factors, such as the Tankan survey, safe-haven inflows and carry trades. The Bank of Japan has maintained low-interest rates since the collapse of Japan's property bubble in the early 1990s. Popular Japanese Yen currency pairings include USD/JPY (the US dollar and the Japanese Yen), EUR/JPY (the Euro and the Japanese Yen) as well as GBP/JPY (the British Pound and the Japanese Yen). Investors need to play close attention to new government policies, interest rates and even natural disasters.

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