How to trade the Japanese yen

Some forex traders restrict their trading to just one pair whilst others trade several at once. In general, it’s preferable to have at least 2 forex markets that you feel comfortable trading so that you have a backup if your currency of choice becomes too volatile, or not volatile enough.

The Japanese yen is an excellent currency to trade because of it’s trending properties. In fact, a recent study by Citigroup showed USDJPY to be the most predictable of all forex pairs. It’s also one of the most heavily traded currencies in the world; not surprisingly, since Japan is one of the biggest economies.

Bank of Japan

The central bank behind the yen is the Bank of Japan, who acts with the mandate to encourage growth and minimise inflation. However, the Bank of Japan has become significantly more aggressive with their approach recently as they have tried to combat two decades of slow growth and deflation.

The new period of loose monetary policy has been given the term Abenomics, based on new Prime Minister Shinzo Abe. It’s seen the Japanese yen lose over 20% in value over a short time and has been responsible for a resurgence in the Japanese stock market.

Economy

Japan’s economy has been sluggish for the past 20 years and growth has rarely ventured beyond 2%. It’s an advanced, service economy that also has its fair share of exporters, particularly automobile manufacturers, such as Toyota, and consumer electronics companies. The economy as a whole is particularly tied to its main trading partner, China, and to the United States.

In truth the economy has never really recovered from its real estate and technology bubble in the 1990’s. Together, with an aging demographic profile and closed attitude to immigration, progress has not been particularly forthcoming.

Yen drivers

Trading the Japanese yen requires keeping up to date with central bank announcements and policy moves which is best done by studying the latest comments from central bank officials. It’s also wise to keep an eye on economic figures, particularly CPI numbers, since inflation is such a big issue for the Japanese economy. The Tankan survey is also an important report for yen traders.

Because of the strength of recent monetary policy it’s also important to watch the trade balance and debt levels as these could have a major effect on Japanese competitiveness in the future. As well as this, the Bank of Japan has at times been involved in currency intervention, whereby it’s sold huge quantities of yen to reduce their value.

The other big thing that drives the yen is the carry trade, this is where traders borrow money in the yen, due to its lower interest rates and park it in a higher yielding currency, such as the Australian dollar. However, in the face of loose monetary policy the benefit of doing so may be rapidly disappearing.