The most popular Asian currency is definitely the Japanese yen. According to the Bank of International Payments’ latest forex market report, the Japanese currency remains the third most traded currency in the world, being party to 17% of foreign exchange transactions.
What is the Japanese yen? The official currency of Japan is the Japanese yen, which was introduced with a new currency law in 1871 in the hope of stabilizing the monetary system in “the country where the sun shines”. The yen replaces the monetary system of the Tokugawa era, a complex monetary system based on copper. The word “yen” means a round object in Japanese, and the symbol for the Japanese yen is JPY.
After the devaluation of silver in 1873, the Japanese yen has recently lost value compared to some of its major competitors, such as the US dollar and the Canadian dollar, which have adopted the gold standard. Then, in 1987, the yen cost just 50 cents. Japan adopted the gold standard that year, stabilizing the value of the Japanese currency.
The Japanese yen – one of the safe havens: Being the most traded currency in the world, after the US dollar and the euro, the Japanese currency is also the fourth reserve currency after the dollar, the euro and the pound sterling. But perhaps more importantly, the Japanese yen is considered a safe haven asset in times of uncertainty, along with sovereign bonds, gold and the Swiss franc.
But what is the situation with the yen? Here are some factors that make Japanese yen assets a haven in difficult times:
- Interest rates have been very low in Japan for a long time. So it is very cheap to get yen to finance your other investments.
- Japanese investors are more exposed to foreign assets than foreign investors to Japanese assets. Therefore, in times of uncertainty, the return to cash and demand for the Japanese yen increases.
How to trade the dollar and the Japanese yen
In 1882, Central Bank of Japan was created to control the money supply and prevent other countries from cutting off the Japanese yen. Since the 1990s, the Japanese economy has been suffering from a “chronic illness” caused by deflation, and the Bank of Japan has launched a series of policies to counter the country’s deflationary spiral. In 1999, Japanese central banks began their commitment to rising consumer inflation, launching the world’s first quantitative easing program.
However, BOJ’s efforts have not been successful, especially since 2008 global financial crisis. In 2013, central bank merged with the Japanese government, led by Shinzo Abe, to achieve a 2% inflation target. However, CPI is still far from the bank’s targets.
Why is the Japanese yen low? The reason for our “bullish trend” on the USD/JPY pair is the expected pressure from the US 10-year Treasury bond yields reaching their highest levels since December 2018, and the significant difference in the Bank of Japan’s accommodative monetary policy stance in contrast to hawkish Federal Reserve, which has been One of the main drivers of the recent rise since the beginning of April, which in the same way explains why the Japanese Yen is currently low.
While we still consider that the new wave of global financial market fluctuations is harmful to risk due to the Russian-Ukrainian conflict and fears of an increase in Covid-19 cases again, US dollar is still the biggest winner and the favorite among investors, as it has risen so far against most major currencies, not just Japanese yen. .
However, continuing the upward momentum may take a resting position soon and may reverse slightly for a short-term technical correction before continuing the rise. Technically, the Relative Strength Index is above the 70 level, which is the overbought limit.
How to trade dollar yen and what factors affect price of Japanese yen?
There are fundamental factors for every currency in the world that can have a severe impact on its price. Japanese yen is no exception. But let’s see some of the main drivers of the Japanese Yen’s path:
- The monetary policy of the Central Bank of Japan.
- Financial market sentiment.
- Economic indicators.
- Geopolitical factors
The Japanese Yen and the Monetary Policy of the Bank of Japan: For many years the central bank’s policy has been very expansionary, with many economic stimulus such as:
- Negative interest rates
- Asset purchase programs
- Controlling the yield curve on government bonds.
Yield curve control involves keeping the 10-year Japanese bond yield at around 0, while short-term interest rates remain negative. The purpose of this approach is generally a steeper yield curve, which means a wider gap between the yield of short-term and long-term government securities.
The relationship between bonds (not only Japanese, but also American) and the Japanese currency is strong. For example, it often happens when the price of US bonds rises, ie. Its yield decreases, the demand for the Japanese yen increases. The opposite may also be true.
Negative interest rates in Japan after the 1990s mean that the yen is very cheap to borrow. This encourages the use of “carry trading” strategies. Traders use the low-cost Japanese yen to buy high-yielding assets. This allows them to earn the difference between interest rates in terms of yield.
Market sentiment and the price of the Japanese yen
The Japanese yen is one of the currencies most exposed to the prevailing market sentiment. When markets are optimistic, risk appetite looks for high-yielding assets such as companies, oil and currencies such as the Australian, New Zealand and Canadian dollars. Therefore, their prices rise due to high demand.
How to trade the dollar yen, economic data and the Japanese yen
Economic indicators often have a significant impact on local currency rates, but this is not entirely true of macroeconomic indicators from Japan.
Due to the atypical monetary policy in the “country where the sun shines”, the main economic indicators do not have such a serious impact on the USD/JPY or JPY/EUR pair.
However, those who trade currency pairs linked to the Japanese Yen are advised to monitor some economic indicators so that they can try to predict the next steps of the Bank of Japan. Here are some of them:
- Consumer price index
- gross domestic product
- Industrial production
- Tankan index
Why is Japanese Yen trading so popular? There were other factors that could tip the balance in favor of Forex trading with the Japanese currency:
- You can trade currency pairs with the Japanese Yen 24 hours a day, 5 days a week.
- You can choose the most suitable trading periods and benefit from increased volatility.
- Trading with major currency pairs guarantees you high liquidity with extremely fast execution of orders from Admirals trading platforms.
- Low spreads
- You can also trade on rising and falling prices through CFDs.
- Benefit from access to leverage of up to 1:500.
However, the Japanese yen has its drawbacks:
- Trading currency pairs involving the Japanese Yen (USD/JPY; EUR/JPY, GBP/JPY, CHF/JPY, CAD/JPY, AUD/JPY and NZD/JPY) is subject to negative swap fees when holding positions. Open at night.
- Using leverage in trading the Japanese Yen can be dangerous when it becomes an unwise trade.
In the Asian session, the USDJPY saw sideways movement, but during the European trading session it tried to regain upward momentum. The pair shows conservatism in its movements, waiting for signals to appear confirming the final direction of movement.
