Everything you should know about the Japanese Yen

Introduction to the Japanese Yen

The Japanese Yen is the national currency of Japan, known by the abbreviation JPY. Over 83% of trades on the forex market are made using just seven currencies, and the Yen is the third most used – behind the US Dollar and Euro.¹  

The popularity of the Yen means that it typically has good trading conditions as a result of its high liquidity – which can include lower spreads and faster execution. It’s also extremely well covered in analysis and trading forecasts, creating a wealth of information that you can use to get started.

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Economy of Japan

Japan has one of the largest economies in the world, ranking third in terms of gross domestic product (GDP) and fifth for the largest number of exports. The country is most well-known for its production of consumer electronics, automobiles and technology.

The Bank of Japan controls the Japanese yen, acting to encourage growth and keep inflation in check. However, the country has experienced low economic growth rates ever since 1990, when the equity and real estate markets collapsed.

As a result, Japan has had almost 25 years of fiscal stimulus policies to kickstart the economy, making deflation a constant source of concern surrounding the Yen. To boost demand for its currency, the BOJ pursued low interest rates – even negative real rates – throughout the 2010s, but this had little impact on economic growth. Japan’s GDP didn’t rise by more than 2.1% between 2011 and 2019.

This period of low economic growth was further exacerbated by the COVID-19 pandemic, which took its toll on Japan’s manufacturing and tourism industries in the first few months of 2020. Japan’s economy shrunk by 8.2% of Q2 2020 alone. However, by November 2020, an increase in global demand for laptops and communication equipment – alongside a mega trade deal between the Asian bloc – resulted in Japan’s GDP growing by 5%. This is the fastest pace of growth on record for Japan.

History of the Japanese Yen

Historically, all the feudal regions in Japan would issue their own currencies which had completely different denominations. This system was removed in 1871, and then Japanese Yen was first introduced as the new decimal currency. However, regional powers still retained the rights to print their own currency until 1882 when the BoJ was introduced to control money supply.

Following World War Two, when the Japanese currency lost most of its value, the Yen exchange rate was linked to the US dollar at 360 yen per USD. The fixed-currency system was eventually scrapped in 1971 and the Yen became free floating. The currency’s value declined after this point, only managing to reach a high of 271 per USD in 1973.

After the equity and housing market collapse in the 1990s, the Japanese government has attempted to keep the value of the Yen low in order to remain competitive abroad. But the 2008 financial crisis reversed the wave of deflation and led to the need to update the Japanese Yen.

The Yen as we know it today was introduced in 2009 as part of a modernisation policy from the government. The government is still known for intervening in forex markets, although it hasn’t done so since 2011.

What moves the price of the Yen?

The price of the Yen is driven by a range of factors that impact the supply of, and demand for, the currency. Many of these drivers are common across the forex market – including economic data releases, central bank meetings, natural disasters, political events and government policies – but there are some that are specific to the Japanese Yen. These include:

The Tankan Survey

The Tankan Survey is a report on Japanese companies that have a specified minimum of capital or are deemed highly influential. They are asked to discuss current trends and economic conditions that could have an impact on their industry over the next quarter and year.

The Tankan survey is released ahead of Japan’s gross domestic product (GDP) data, so is typically viewed as a leading indicator for the report

Carry trades

Due to the low interest rate policies of the BoJ, it’s become common for investors to borrow the Yen to purchase currencies from countries that pay a higher interest rate on their bonds. This is a way to receive high interest on the money invested and pay low interest on the money borrowed.

Typically, these low interest rates mean that whenever markets rally the Yen is weaker than other currencies, as investors sell it to buy other assets. But when there is uncertainty across Asia or financial markets, the currency is driven higher.

Safe-haven inflows

As a result of its relationship with economic uncertainty, the Japanese Yen is widely regarded as a safe-haven asset.

For example, during the COVID-19 outbreak, the BoJ's quantitative easing programme was seen to put Japan’s economy in a better position than most other countries. So, JPY functioned as short-term protection against coronavirus-related economic turmoil.

However, safe-haven inflows drive up the Yen’s price, which often means the Japanese government will step in to bring the valuation down to help the country’s exports.

Currency intervention

The BoJ has continually sold the Yen to keep the currency’s value low and make exports competitive globally.

The Japanese government hasn’t intervened in the forex market since 2011 – when a tsunami and earthquake sent the Yen soaring to 75 per dollar. However, the coronavirus pandemic caused the Yen to experience safe-haven inflows, which saw the currency reach the 100 per dollar price a few times throughout 2020.

The Japanese government has said the 100 per dollar mark is when they would consider stepping in again.

Popular Japanese Yen currency pairings

USD/JPY

USD/JPY is the forex ticker that represents the value of the US dollar against the Japanese Yen – often referred to as ‘The Gopher’. It’s the second most traded currency pairing in the world – behind EUR/USD.

The pair shows you how many Yen you’d need to buy a US Dollar. For example, if the current exchange rate was 103.60, you’d need 103.60 JPY to buy one unit of USD.

The best time of day to trade the USD/JPY pair is when London and New York sessions are in play – between 07:00 and 11:00 EST. This is because the higher trading activity often leads to tighter spreads and increased volatility.

EUR/JPY

EUR/JPY is the forex ticker for the Euro against the Japanese Yen. It shows you how many Yen you’d need to buy a Euro.

It’s the seventh most popular currency pair on the market and makes up approximately 3% of forex transactions worldwide. The pair often experiences volatility, which can provide trading opportunities for short-term speculators.

The EUR/JPY pair is most volatile during the Asian and European sessions, most notably between 2:30 and 10:30 EST.  There is only a two-hour timeframe when the two markets overlap, and although normally this increases activity, it’s not always the case with the Euro-Asian markets. Often, it’s one of the slowest parts of the trading day.

GBP/JPY

GBP/JPY is the forex ticker for the British pound against the Yen. It’s commonly referred to as the ‘Geppy’, ‘Beast’ or ‘Dragon’, largely because it’s an extremely volatile pairing that is best to approach with caution. The Geppy’s volatility makes it risky, but also extremely popular.

Trading GBP/JPY is often not advised for traders just starting out on their forex journeys, but for those with appropriate expertise and risk management in place, the pair can provide a range of opportunities. GBP/JPY has been known to move an average of 150 pips per day, which means stops have to be set wide enough to not close a trade out too early.

The difference between interest rates in the UK and Japan, with the former's much higher than the latter, also makes GBP/JPY an extremely common carry trade.

The best time of day to trade GBP/JPY is around key economic releases, which are at 01:30, 02:00, 08:30, and 10:00 EST, and when the Asian and European sessions overlap between 00:00 and 03:00 EST.

Start trading the Japanese Yen

You can trade the Japanese Yen against other major currencies such as the US Dollar, Euro, British Pound and Australian Dollar, as well as 80+ other pairs, via CFDs. Take your position on whether forex prices will rise or fall in the future, without having to buy the underlying asset.

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Footnotes:

¹Bank for International Statistics, 2019