The Japanese yen (¥), abbreviated to JPY, is the official currency of Japan, an East Asian country with a population of roughly 126,500 that is known to many for its modern and technologically advanced society.
As the primary Asian currency for forex traders worldwide, the yen is highly influential on the forex market and is thought to be included in approximately 16.8% of all forex trades. Meanwhile, Japan’s capital Tokyo — a densely populated metropolis of 36 million people — is the one of the three main centres for global finance.
Indeed, the ‘Tokyo session’ is one of the major daily sessions on the foreign exchange market after the European and North American slots, beginning at midnight (GMT) each trading day and accounting for around 20% of all forex activity.
Continue reading for a whistle-stop tour of what investors need to know about Japan and the JPY:
The Japanese Yen: An Overview
Literally translated to ‘circle’ or ‘round object’ in English, the yen was officially introduced in 1871 by the Meiji Government under the ‘New Currency Act’ as part of an attempt to modernise, standardise and stabilise the Japanese monetary system.
Prior to its introduction, the country’s feudal leaders each issued their own currencies (known as ‘hansatsu’) in logistically incompatible denominations that made trade and transference a laborious process. The yen was previously subdivided into decimalised units of 100 sen or 1,000 rin, but these were removed in 1953.
Considered a major currency today, the JPY is the third most regularly traded currency on the global market after the US dollar (USD) and Euro (EUR) and is among the most common reserve currencies used by central banks worldwide. As the currency of the second-largest economy in Asia (after China), the strength of the yen can also be taken as a bellwether for the strength of the Asian economy as a whole.
Furthermore, it is also regarded as a reliable safe-haven for investors, often leading it to appreciate during times of upheaval; for instance, the JPY reportedly saw an increase in value of more than 20% during the 2008 Global Financial Crisis and its aftermath as key market players were confident it would retain its value despite the ongoing geopolitical challenges.
What are the Main Aspects of Japan’s Monetary Policy?
In most countries, the nation’s central bank and government powers are kept separate and inter-body influence is generally frowned upon. However, this isn’t the case in Japan and the Bank of Japan (BoJ) and Ministry of Finance (MoF) have an unusually complex relationship, with questions sometimes arising over which body is truly in charge; the MoF has been alleged by various commentators to have exerted pressure on the central bank to help the ministry achieve its targets.
Worldwide, the BoJ is renowned for its consistent zero (or near-zero) interest rate policy — often sitting between 0% and 0.10% — and places a high degree of focus on price stability.
One reason for this is the fact that the Japanese economy is very export focused — primarily through electrical technologies like motor vehicles, computers, medical apparatus and semiconductor components — which means that if the JPY’s value rises too much, the nation’s produce will become comparatively more expensive (and thus less competitive on the global market).
The BoJ’s thinking, therefore, is that by monitoring the yen’s value and ensuring it remains competitively priced, Japanese exports remain affordable and demand remains steady, contributing to greater economic growth for the country overall.
This policy has been relatively effective in keeping Japan competitive on the world stage, though the inflexibility of the constant negligibly low interest rates — ie. the lack of room to drop them even further — has occasionally lead the BoJ to resort to less-than-ideal tactics in times of difficulty, such as quantitative easing via flooding the market with newly printed currency to fight deflation.
Further reading: https://www.investopedia.com/terms/b/bankofjapan.asp
What is Abenomics?
The phrase ‘Abenomics’ is a blanket term for the economic policies brought in by then-Prime Minister Shinzo Abe upon his re-election in 2012, which have been credited with reshaping Japan’s economic climate over the last decade; Abe’s successor Yoshihide Suga has indicated his administration will follow largely the same model.
At its core, Abenomics focuses on three core principles (or ‘three arrows’): quantitative easing through the printing of around ¥60trn-¥70trn extra currency, increased government spending and fiscal stimuli to encourage short-term growth, and structural reforms to make the Japanese economy more attractive to outside investors (including relaxing certain restrictions and providing support for entrepreneurs).
Analysts have credited the Abenomics plan for increasing both the country’s nominal GDP and tax revenues, as well as hitting inflation targets and stabilising government debt relative to the national income.
However, critics have pointed out that Abe’s reforms did not result in the level of investment they were intended to achieve, and the doctrine also failed to factor in one key concern for the country’s economic future: Japan’s rapidly ageing population.
Further reading: https://www.thebalance.com/what-is-abenomics-1979092
What are the Most Important Economic Indicators for JPY?
Like all major currencies, there are numerous pieces of economic data that traders can look to when attempting to judge where the JPY market may be moving next.
Among the most salient reports for fundamental analysis of the yen are:
· Gross Domestic Product (GDP) shows a holistic snapshot of the Japanese economy’s health, giving the total market value of the output (ie. finished goods/services) within Japanese borders. It is typically calculated annually with forecasts given and revised throughout the year
· Unemployment Figures show the rate of unemployment throughout Japan; high unemployment typically correlates to less economic stability and potentially lower consumer spending, so fewer Japanese citizens in work could forecast trouble ahead for the yen
· Consumer Price Index (CPI) shows the change in average prices of the consumer goods and services purchased by Japanese households. As the BoJ is no stranger to intervening in economic affairs, significant moves in either direction may indicate new fiscal policies could be on the horizon
· Trade Balance shows the level of imports coming into Japan vs the nation’s exports to foreign countries; given the Japanese economy is notably export-heavy, falling export numbers generally signal a decline in economic activity overall
· Core Machinery Orders show the number of orders placed for machinery and technological goods on either a month-on-month or year-on-year basis; these products make up a large part of Japan’s factory activity and so are indicative of the country’s productivity overall
· Tankan Surveys are quarterly surveys of businesses from a variety of sectors of the Japanese economy regarding their outlook and degree of optimism. Issued by the BoJ, the questionnaires consist of 4 sections and 26 items, with a score above 0.0 indicating rising sentiment and anything in minus territory suggesting weakening business confidence in the country’s economic prospects
Further reading: https://www.fxcm.com/markets/insights/top-economic-indicators-for-the-japanese-economy/
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