What Forex traders need to know about the yen

The foreign exchange market is huge and ruthlessly competitive.
Big banks, trading houses and funds dominate the market and quickly incorporate new information into prices.
Therefore, forex trading is not a market for the unprepared.
To effectively trade currency on a fundamental basis, traders must be knowledgeable when it comes to the major foreign currencies.
This knowledge should include not only the current economic statistics of a country, but also the fundamentals of the respective economy and the special factors that can affect the currencies, such as commodity movements or interest rate changes.

An introduction to the Yen

With just seven currencies accounting for 83% of the forex market, the Japanese yen is one of the largest currencies in terms of international trade and forex trading.
The yen accounts for 17% of Forex trade.
Japan is one of the largest economies in the world with one of the highest GDPs among nations; it is also one of the largest exporters, in dollar terms.
It is widely considered that the Japanese yen is the third most traded currency in the Forex market after the dollar and the euro.
The currency code of the yen is JPY.
The popularity of the yen means that it usually enjoys good trading conditions as a result of its high liquidity – which can include lower spreads and faster execution.
It’s also extremely well covered in analysis and trading forecasts, creating a wealth of information that you can use to get started.
All the major currencies in the forex market have central banks behind them.
In the case of the Japanese yen, it’s the Bank of Japan (BoJ).
Like most central banks in developing countries, the BoJ has a mandate to act in a way that encourages growth and minimizes inflation.
In Japan, however, deflation has been a persistent threat for many years, and the BOJ has pursued a policy of very low interest rates in the hope of stimulating demand and economic growth.
At various points in the 2010s, actual interest rates in Japan were actually negative.

The economy of Japan

Japan has one of the largest economies in the world, ranking third in terms of gross domestic product (GDP) and fifth for exports.
The country is best known for its production of consumer electronics, cars and technology.
The Bank of Japan controls the Japanese yen and acts to encourage growth and keep inflation in check.
However, the country has experienced low economic growth rates since 1990, when the stock and real estate markets collapsed.
As a result, Japan has had almost 25 years of fiscal stimulus policies to kick-start the economy, making deflation a constant source of concern around the Yen.
To boost demand for its currency, the BOJ pursued low interest rates – even negative real rates – during the 2010s, but this had little impact on economic growth.
Japan’s GDP grew by no more than 2.1% between 2011 and 2019.
This period of low economic growth was further exacerbated by the COVID-19 pandemic, which took its toll on Japan’s manufacturing and tourism industries in the first months of 2020.
Japan’s economy shrank by only 8.2% by the second quarter of 2020.
But in November 2020, a surge in global demand for laptops and communications equipment – along with a mega trade deal between the Asian bloc – resulted in Japan’s GDP growing by 5%.
This is the fastest growth rate for Japan.

The economy behind the yen

The Japanese economy has some special and peculiar attributes that yen traders need to understand.
First, despite its size, Japan has had a considerable lack of growth since the collapse of its stock and real estate bubbles in 1990.
Writers often refer to the subsequent years as a ‘lost decade’ in Japan because of this reason.
Since then, growth has rarely exceeded 2% in Japan between 2001 and 2011 and fell 29% from 2012 to 2015.
Indeed, Japan has experienced deflation for much of the last 20 years.
Second, Japan is also one of the oldest major economies in the world and has one of the lowest fertility rates.
Because of this, Japan, which was once fairly closed to immigration, recently began opening its borders to foreign workers to address labor shortages Finally, Japan is also an advanced economy with a well-educated workforce.
Although industries such as shipbuilding have somewhat migrated to countries such as South Korea and China, Japan remains a leading manufacturer of consumer electronics, automobiles and engineering components.
This has left Japan with significant exposure to the global economy.

History of the yen

Historically, all the feudal regions of Japan would issue their own currencies which had completely different denominations.
This system was removed in 1871, and then the Japanese yen was first introduced as the new decimal currency.
However, regional powers still retained the right to print their own currency until 1882 when the BoJ was introduced to control the money supply.
After World War II, when the Japanese currency lost most of its value, the yen exchange rate was pegged to the US dollar at 360 yen per USD.
The fixed currency system was eventually abolished in 1971 and the yen became free floating.
The value of the currency declined after this point and only managed to reach a peak of 271 per USD in 1973.
After the collapse of the stock and housing markets in the 1990s, the Japanese government has tried to keep the value of the yen low to remain competitive abroad.
However, the 2008 financial crisis turned the tide of deflation and led to the need to update the Japanese yen.
The yen as we know it today was introduced in 2009 as part of a government modernization policy.
The government is still known to have intervened in foreign exchange markets, although it has not done so since 2011.

What determines the exchange rate of the yen

There are several theories that attempt to explain exchange rates.
Purchasing power parity, interest rate parity, the Fisher effect and balance of payments models all explain the ‘right’ exchange rate, based on factors such as relative interest rates, price levels and so on.
In practice, these models don’t work very well in the real market – real market exchange rates are determined by supply and demand, which includes a variety of market psychology factors.
Major economic data includes the publication of GDP, retail sales, industrial production, inflation and trade balances.
Investors should also take note of the information on employment, interest rates (including scheduled central bank meetings) and the daily news flow.
Natural disasters, elections and new government policies can all have significant effects on exchange rates.
In the case of Japan and yen traders, the Tankan survey is particularly noteworthy.
Many countries report information on business confidence, and the Tankan is a quarterly report published by the Bank of Japan.
The Tankan is seen as a very important report and often concerns trading in Japanese stocks and the yen.
In many respects, BoJ policies conduct trading all over the world.
Carry trading refers to borrowing money in a low interest rate environment and then investing that money in higher yielding assets from other countries.
With a stated policy of near-zero interest rates, Japan has long been a major source of capital for that trade.
That means, however, that talk of higher interest rates in Japan could create ripples across currency markets.

Unique factors for the Japanese yen

While the BoJ has maintained low interest rates since the collapse of Japan’s real estate bubble, it has also been involved in currency intervention – selling the yen to keep Japanese exports more competitive.
This intervention has had political consequences in the past, so the Bank is relatively hesitant to intervene in currency markets.
Japan’s trade balance also affects BoJ policy and exchange rates.
Japan has historically had large trade surpluses, but very large public debt and an ageing population.
However, a large share of that debt is held domestically, and Japanese investors seem willing to accept low yields.
While Japan has very high debt levels, traders tend to be more comfortable with Japan’s debt balance.
Moreover, traders often balance Japan’s high debt level with the usual high trade surplus, although the devaluation of the dollar and the yen’s “safe haven” status have led the Japanese currency to become so strong that it threatens the very trade surplus that makes it attractive.
In fact, over the past decade they have characterized an increasingly large deficit.

Value added intervention

The BoJ has continuously sold the yen to keep the currency’s value low and make exports competitive globally.
The Japanese government has not intervened in the currency market since 2011 – when a tsunami and earthquake sent the Yen to 75 per dollar.
However, the coronavirus pandemic caused the Yen to be perceived as a safe haven, which saw the currency reach the 100 yen/dollar price a few times in 2020.
The Japanese government has said that 100 yen per dollar is when they would consider re-entering.

Popular Japanese currency pairs

USD / JPY

USD/JPY is the combination that represents the value of the US dollar against the Japanese yen – often called ‘The Gopher’.
It is the second most traded currency pair worldwide – after EUR/USD. The pair shows how many yen you need to buy one US dollar.
For example, if the current exchange rate was 103.60, you would need 103.60 JPY to buy one unit of USD.
The best time of day to trade the USD/JPY pair is when the London and New York sessions are open – between 07:00 and 11:00 EST.
This is because the higher trading activity often leads to tighter spreads and increased volatility.

EUR / JPY

EUR/JPY is the combination for the euro against the Japanese yen.
It shows how many yen you need to buy one euro.
It is the seventh most popular currency pair on the market and makes up around 3% of forex transactions worldwide.
The pair often experiences volatility, which can provide trading opportunities for short-term speculators.
The EUR/JPY pair is most volatile during the Asian and European sessions, especially between 2:30 am and 10:30 am EST.
There is only a two-hour time frame when the two markets overlap, and while this normally increases activity, it is not always the case with the Euro-Asian markets.
Often it is one of the slowest parts of the trading day.

GBP / JPY

GBP/JPY is the combination for the British Pound against the Yen.
It is commonly referred to as ‘Geppy’, ‘Beast’ or ‘Dragon’, largely because it is an extremely volatile pair that is best approached with caution.
Geppy’s volatility makes it risky but also extremely popular.
Trading GBP/JPY is often not recommended for traders just starting out on their currency journeys, but for those with the appropriate expertise and risk management in place, the pair can provide a range of opportunities.
GBP/JPY has been known to move an average of 150 pips per day, meaning that a stop loss must be set wide enough so as not to end a trade prematurely.
The difference between interest rates in the UK and Japan, with the former much higher than the latter, also makes GBP/JPY an extremely common carry trade.
The best time of day to trade GBP/JPY is around key economic releases, which are at 01:30, 02:00, 08:30 and 10:00 EST, and when the Asian and European sessions overlap between 00:00 and 03:00 EST.

Start trading the Japanese yen

You can trade the Japanese Yen against other major currencies such as the US Dollar, Euro, British Pound and Australian Dollar, as well as 80+ other pairs, via CFDs.
Take a position on whether currency prices will rise or fall in the future without having to buy the underlying asset.

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