Trading in USD/JPY implies selling or buying the US dollar against the Japanese yen. Commonly referred to as the Ninja, this currency pair gains its nickname from the iconic heroic character originating from Japan.
USD/JPY is classified among the majors in the forex market, being one of the most traded currency pairs. In this pairing, the Japanese yen is referred to as the quote currency. On the other hand, the US dollar functions as the base currency. For example, when the USD/JPY price is 130, it means that you need 130 Japanese yen to buy 1 US dollar.
Forex traders favor the USD/JPY pair due to its consistent activity throughout trading sessions, especially during unconventional Asian hours. This characteristic ensures a 24-hour market, making it an attractive choice for those who trade full-time.
The US Dollar And Japanese Yen History
The USD/JPY has a historical backdrop marked by the prominence of the US dollar as the world’s primary reserve currency. However, during the 1980s, the yen made a notable bid for that status. Despite Japan’s sustained economic downturn preventing the yen from realizing its aspirations, the currency retains significant global influence and is the fourth-largest reserve currency.
Japan has consistently ranked among the world’s major net exporters, with exports making up approximately 40% of its economic landscape. This heavy dependence on exports has led the Japanese government to frequently intervene in the currency market to regulate product prices in international markets.
While Japan’s dream of the yen becoming the world’s primary reserve currency did not materialize, it remains highly liquid in Asia. It is often utilized as a proxy for overall economic growth in the Asian region, underlining its enduring significance despite not attaining the coveted reserve currency status.
Major Influential Entities Affecting the USD-JPY Pair
Interest Rates
The primary entity exerting influence on the USD-JPY pair is the Bank of Japan (BoJ), known for its frequent market interventions. Monthly releases of interest rates by the BoJ, accompanied by rate statements, provide traders and investors with insights into future policy directions.
The US Federal Reserve is another key player affecting the USD-yen pair. Their monetary decisions can shape the pair’s dynamics since the US Fed releases interest rates eight times annually.
Economy’s Performance
Compared to the Japanese economy, a strong US economy means a strong USD against the Yen. A decline in US economic performance and an increase in Japanese economic growth means the yen is gaining strength over the dollar.
The USD/JPY pair strongly correlates with commodity prices, particularly oil. This correlation is logical, given that Japan is one of the world’s most industrialized nations and a major importer of commodities.
The Japanese yen tends to weaken when oil prices rise and strengthen when oil prices fall. Consequently, the USD/JPY pair tends to rise with increasing oil prices and fall when oil prices decline. Despite this correlation, practical market analysis is crucial before trading the USD/JPY pair.
The Unique Characteristics of the Japanese Economy
The Japanese economy presents distinct features crucial for yen traders to comprehend. To begin with, despite its economic size, Japan has grappled with a noticeable lack of growth since the burst of its equity and real estate bubbles in 1990. Often referred to as the “lost decade,” the years following the collapse saw limited growth. Japan experienced growth rates rarely exceeding 2% from 2001 to 2011 and a substantial decline of 29% from 2012 to 2015.
Japan stands out for its noteworthy stance on inflation or, instead, the near absence of it. Japan has contended with deflation for the last two decades, marking a distinctive economic trend.
Regarding global ranking, Japan is among the oldest major economies with the lowest fertility rates. This demographic makeup implies an increasingly aging workforce and a decline in younger workers to sustain the economy through taxation and consumption. Recognizing the impact of this demographic shift, Japan, traditionally reserved about immigration, has recently started opening its borders to foreign workers to alleviate labor shortages.
While industries like shipbuilding have relocated to countries such as South Korea and China, Japan remains a crucial player in producing consumer electronics, automobiles, and technological components. This economic landscape exposes Japan significantly to the global economy, underscoring its continued relevance in evolving international trade dynamics.
Highs and Lows of The US Dollar And Japanese Yen
The intervention of the Japanese government in the markets has established the Ninja as a currency pair characterized by distinct patterns. Throughout its history, the pair has typically stayed within the price range of 76 to 146.
In more recent times, this range has narrowed to approximately 85 to 130. However, the pair recorded its historical highs at 306.84 in December 1985 and reached its all-time lows at 75.74 in October 2011, coinciding with the global financial crisis.
Conclusion
Japan’s adoption of low domestic interest rates during deflation transformed the yen into a haven. This characterization implies that the value of the yen typically experiences an upswing during market turbulence.
In times of heightened market stress, the usual flow of Japanese funds into higher-yielding currencies, like the US dollar, tends to reverse course, causing an appreciation of the yen against the dollar. This phenomenon was clearly illustrated during the Great Recession when the USD/JPY rate plummeted from 120 in 2007 to below 90 by 2009.
The years after the Great Recession were the time for the yen to depreciate gradually against the US dollar as the global economy recovered. This depreciation gained momentum in 2013, propelled by the Bank of Japan’s initiation of large-scale quantitative easing measures.