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Forex Trading: What is the Japanese Yen?

The Japanese yen is the third most traded currency in the foreign exchange market. Characterized as a stable currency, investors see it as a safe place to put their money. But do you know its history?

Despite being a safe bet, low growth has meant trading in the yen is not for everyone. Read on as we discuss forex trading using this global currency. 

Japanese yen currency displayed as a trading option in the forex market

History of the Japanese Yen

At one point, there were 1694 currencies in Japan. Feudal lords were able to mint their own coins, meaning the country’s economy lacked cohesion. It was not until 1868 that social and political upheavals pointed to a date in the future where one currency would rule the land. 

In 1871 the yen was adopted as the common currency. It was named after its round coin shape. Each of these was set to equal 1.5 grams of gold and 24.3 grams of silver. 

More reforms came in 1933 when the yen exchange was linked to the US dollar. It was recognized as a world currency by the IMF in 1953 bringing it into line with world financial markets. 1973 saw it unlinked with the US dollar and become a free currency. 

The Japanese Economy

Japan is the third-biggest market in the world in terms of gross domestic product. It also has the fifth-largest number of exports due to its low-value currency and produces items such as electronics, technology, and automobiles.

Free movement of capital is encouraged making it attractive for counter OTC trades. Money can come into and out of the country for investment. When more money comes in the currency goes up, when more leaves it goes downward. 

The Bank of Japan works with the country’s Ministry of Finance to curb any major fluctuations. As it relies heavily on electronics for its industry it has a large exposure to the global economy. 

Lack of Growth in the Japanese Economy

In 1990 the Japanese market experienced a collapse in real estate and equity. A lost decade followed in which growth rarely went above 2% and then took a serious 29% dip starting in 2012. A period of deflation has taken place over the past 20 years. 

There have been numerous fiscal policies adopted over this period to attempt to kickstart the economy. However, a declining population and the COVID pandemic have done little to help. 

What Moves the Price of the Japanese Yen?

There is a whole range of factors that can influence the value of the Yen. While some of these may be common to any foreign currencies on the traded market some are specific to the currency itself. 

Carry Trades

Carry trading is when money is borrowed in a low-interest-rate environment. That money is then invested in assets that have a high yield.

As Japan has an interest rate of almost zero, many borrow from it to fund other assets, driving carry trades. However, as so many do this, any talk of a rise in rates can have huge financial implications across the stock market.

Safe Haven Inflows

As the Japanese economy is seen as one of the most stable markets in the world, many investors want to put their money in it. When this happens in large amounts it drives the price of the currency up. 

Intervention

During the global pandemic, the yen experienced safe-haven inflows. As people sought to put their money in yen, its value rose to 100 per dollar multiple times during the pandemic. 

This is in contrast to the Central Bank of Japan’s normal policy. They sell the currency low to keep exports competitive.

Japan’s government tends to stay away from anything to do with the forex market. Their last intervention was during the earthquake and tsunami of 2011. 

The Takan Survey

Anyone considering FX trading with the yen should have an understanding of the Tankan Survey. It is a report on high level Japanese companies that is published quarterly.

In it, discussions are made on economic conditions, trends, and general confidence in the markets. This can have a huge impact on the exchange rate and currency in general. 

Popular Yen Currency Pairings for Forex Trading

For anyone new to the foreign exchange market there are several popular currency pairs you may find on a trading platform. These combinations work by using the second currency on the list, also known as the quote currency, to value the first. Below are the most popular combinations. 

USD/JPY

Behind the combination of EUR/USD (leading currency pair traded), USD/JPY is one of the most traded currency pairing. It shows you how many yen you would need to buy to get a US dollar. If you are thinking of trading in this pair, wait for the time when both the New York and London stock exchanges are open for increased volatility. 

USD/JPY CHART

GBP/JPY

This combination is one of the most volatile in FX trading. Earning itself the moniker of ‘Dragon’ the risk is what makes it popular. It can move a lot in a day meaning stops should be managed accordingly when spreads widen to avoid closing early. 

As the UK interest rate is often much higher than Japan’s it makes it a popular carry trade. It is best to do trading with the British pound and the yen at key economic release times. 

EUR/JPY

The euro against the yen is the seventh most popular pairing for currency exchange. With it comes a level of volatility, especially when European and Asian sessions are open. There is only a two-hour timeframe when both markets overlap, though this is often the most sedate time. 

Trading With the Yen

Now you know about the Japanese yen, you should consider forex trading with the currency. It has a lower level of risk for beginners and will allow you to get to grips with the market. Find a platform that lets you trade in real-time and let your investments begin. 

Your first stop should be Baxia. We have several trading platforms to suit your needs, providing CFDs and forex. Click here to create an account and start trading today. 

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