What do traders need to know about the Yen?
Despite the many attractive characteristics of forex, the foreign exchange market is huge, complex, and ruthlessly competitive. Large banks, trading houses and funds dominate the market and quickly include any new information in prices.
The foreign exchange rate is not a market for the unprepared or ignorant. In order to trade foreign currencies effectively on a fundamental basis, traders must be knowledgeable when it comes to major currencies. This knowledge should include not only current economic statistics for the country, but also the fundamentals of the economies of the countries concerned and special factors that may affect currencies.
The Idea of Yen
Only seven currencies account for 80% of the forex market and the Japanese yen is one of the largest currencies
in terms of international trade and foreign exchange trading. This is quite appropriate, since Japan is one of the largest economies in the world, with one of the highest GDP between countries and is one of the largest exporters, in dollar terms.
All major currencies in the forex market have central banks behind them. In the case of the Japanese yen, it is the Bank of Japan. Like most developed central banks, the Bank of Japan has the authority to operate in a fashion that encourages growth and minimizes inflation. In Japan’s case, however, deflation has been a constant threat for many years, and the Bank of Japan has pursued a policy of very low tariffs in the hope of stimulating demand and economic growth. At various points in the 2000s, real rates in Japan were actually slightly negative.
The Economy Behind the Yen
The Japanese economy has some particular and specific attributes that yen traders need to understand. First, despite its size, Japan has recently noticeably lacked growth since the collapse of the real estate market. On this occasion, many analysts often refer to the “lost decade” in Japan. Although this may not be completely accurate, as growth in Japan rarely exceeded 2% between 2001 and 2011. Based on this, many contracts that were concluded, very often were either zero or with a negative rate. Japan is also notable for inflation, or rather its almost complete absence. Japan has actually experienced deflation for most of the past decade.
Second, Japan is also the oldest major economy in the world, and has one of the lowest fertility rates. This suggests an increasingly aging workforce with fewer and fewer young workers to sustain the economy through taxation and consumption. Japan is also very closed to immigration, which also does not improve demographic indicators.
Finally, Japan is also a developed economy with a well-educated workforce. And although in industries such as shipbuilding there is a migration of Japanese to countries such as South Korea and China, Japan is still one of the leading manufacturers of consumer electronics, cars and technological components. These factors allow Japan to significantly influence the world economy, and more widely use China as a trading partner.
Yen Drivers
There are several theories that attempt to explain exchange rates. Purchasing power parity, interest rate parity, the Fisher effect, and the balance of payment models. They all offer explanations for the “right” rate, based on factors such as relative interest rates, price levels, and so on. In practice, these models do not work particularly well in the real market – real market exchange rates are determined by supply and demand, which includes a number of market psychology factors.
Key economic data include GDP output, retail sales, industrial production, inflation, and trade balances. They come out on a regular basis, and many brokers, as well as many financial sources of information, such as the Wall Street Journal and Bloomberg, give this information in the public domain. Investors should also take note of employment information, interest rates (including regular central bank meetings) and daily news flow; Natural disasters, elections, and new government policies can all have serious implications for exchange rates.
Many technical analysis strategies are suitable for trading the Japanese yen.
In the case of Japan and for yen traders, Tankan deserves the most attention. Many countries report information on business confidence, and Tankan is a quarterly source published by the Bank of Japan. Tankan is regarded as a very important report, and is often used in Japanese stock and currency exchanges. Data on trade flows is also extremely important for the yen.
Carrie Trade
In many ways, the Bank of Japan’s policies carry their industries around the world. The Carrie Trade refers to borrowing money at a low interest rate and then investing that money in high-yielding assets from other countries. With a stated policy of near-zero interest rates, Japan has long been a major source of capital for this trade. However, this also means that talk of high rates in Japan may fluctuate slightly across all currency markets.
Unique factors of the Japanese yen
While the Bank of Japan has kept prices low since Japan’s economic collapse, the bank has also been involved in currency intervention. Such actions included selling the yen to help keep Japanese exports more competitive. This interference has introduced political repercussions in the past, which has led the Bank of Japan to be hesitant to intervene in foreign exchange markets relative to its past history.
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Japan’s trade balance also affects the Bank of Japan’s policy and forex rates. Japan has large trade surpluses, but a very large public debt and an aging population. A large percentage of this debt is held in the domestic market, however, and Japanese investors seem ready to accept low yields.
The yen is the currency signature for Asia; It is one of the best, most frequently traded currencies in the world, and a significant reserve currency for many Asian countries. Although the value of the yen may be in jeopardy if the Chinese yuan becomes more liquid, which, however, may become a reality many years later.
However, the relative stability of the yen has made it a reserve currency for many countries. As long as Japan has very high debt levels, traders tend to feel more comfortable with Japan’s debt balance as long as most of it is in the domestic property market. Moreover, traders often balance Japan’s high debt level with its high trade surplus, even though the devaluation of the dollar and the yen’s safe-haven status has led to a strengthening of the yen. This threatens the trade balance itself, which makes the yen attractive.
Dry residue
Exchange rates are notoriously difficult to predict, and most models rarely work for shorter periods of time. While economics-based models are rarely useful for short-term traders, economic conditions shape long-term trends. Japan’s strong trade surplus is likely to maintain the country’s position as a relatively safe haven for some time, but an aging workforce, stubbornly low consumer and business confidence, and China’s growing importance as an economic competitor threaten this position.
Knowing everything about the Japanese Yen, you will be able to trade on the news using the economic calendar.
