The Yen is the currency of the nation of Japan. In the foreign exchange market, it is the third most traded currency behind the American dollar and the Euro. It is denoted with a leading ¥. For example, ¥500 is read "five-hundred Yen".
The value of the Japanese Yen is driven by demand and supply of the currency. Historically, the Bank of Japan, the country's central bank, has kept interest rates low in order to spur economic growth. Low interest rates since the mid 1990s combined with a ready liquidity for the Yen prompted investors to borrow money in Japan and invest it in other countries (a practice known as carry trade). This has helped to keep the value of the Yen low compared to other currencies. The Bank of Japan maintains a policy of keeping the Yen weak against other currencies and is expected to intervene should it fall below ¥90 per dollar.
On the other hand, an extremely low inflation rate and a weaker Yen has helped the Japanese export sector flourish during this period. In 2007, Japan had a current account surplus of approximately ¥25 trillion ($227 billion) of which ¥12.5 trillion ($113 billion) came from its trade surplus against other countries. The export sector has helped the Yen by maintaining a high demand for it. Going forward, the value of the Yen will depend on Japanese interest rates relative to other countries and on the competitiveness of the Japanese export sector. In 2008, both the Federal Reserve and European Central Bank aggressively drove down interest rates in the US and the European Union.
The value of Yen relative to other currencies is determined by the demand and supply of the yen. Factors which influence these market forces affect the value of the Yen.
The current account is a function of trade balance (exports minus imports), income from abroad (such as dividends, income by foreign subsidiaries etc.) and other transfers (such as foreign aid and grants). Since the mid- 90s Japan has maintained an extremely strong current account, mainly because of the country's strong export sector. In 2007, Japan had a current account surplus of approximately ¥25 trillion ($227 billion) of which ¥12.5 trillion ($113 billion) came from its trade surplus against other countries. Economic theory suggests that a strong current account leads to currency appreciation -- since foreign importers need to buy the Japanese yen to pay Japanese manufacturers.
Since the late 1980s, the Bank of Japan has been driving the interest rate to very low levels in order to spur economic growth. Short-term lending rates have responded to this monetary relaxation and fell from 3.7% to 1.3% between 1993 and 2008. This made it profitable to borrow money in Japan in order to fund investments in other countries. This activity, better known as yen carry trade, bears the risk of being losing bets when the Japanese Yen appreciates against other currencies. Carry trades have been a key determinant of the value of yen relative to other currencies. Based on short Yen futures positions, which are used to hedge against the risk of Yen appreciating, the total amount of Japanese Yen used in carry trades is estimated to be around ¥125 trillion ($1.2 trillion).
Historically, carry trades have helped to keep the value of Yen low compared to the US dollar and other major currencies. However, they also make the Japanese Yen extremely sensitive to financial crises across the globe. During the Russian financial crisis in 1998, the Yen gained 20% in two months. After the US subprime crisis the Yen rose from ¥124/dollar in June 2007 to ¥94/dollar in October 2008. The amount of carry-trades is dependent on Japan maintaining a low interest rate relative to other countries. In 2008, both the Federal Reserve and European Central Bank aggressively drove down interest rates in the US and the European Union.
Inflation is the result of rising prices in an economy over time. In other words, when the inflation rate is positive, a currency buys fewer goods than it did in the previously. Japan has had one of the lowest inflation rates since the mid 1990s. In fact, price levels in Japan decreased between 1998 and 2004 (i.e. Japan went through a deflationary phase). The low inflation rate has kept Japanese products cheap compared to products from other countries -- making Japanese industries more competitive. This has added to Japan's export growth and, in turn, increased demand for the Yen.
The inflation rate is also dependent on the value of the Yen since a weaker currency leads to greater demand for Japanese products and makes imports more expensive for Japan -- hence increasing the inflation rate.
An investor can invest in the Yen by buying and holding it. Currencies, as an asset class, do not produce any returns by themselves. The currency is only useful if it is invested in another asset (such as equities or bond).
Investors can buy and sell Yen futures traded at the Chicago Mercantile Exchange. Futures are better instruments for speculation since they are leveraged and hence are more sensitive to currency movements. An investor can also buy a Japanese stock ETF -- such as the iShares Japan Index (EWJ). The CurrencyShares Japanese Yen Trust (FXY) offers return on Japanese Yen plus accrued interest. ETF's have the benefit of offering the return on the underlying asset class in addition to currency appreciation.
Finally, a stronger yen helps Japanese imports by making them relatively cheaper and hurts exports by making them more expensive for foreign buyers. An investor could bet on the Japanese Yen by taking positions in Japanese exporters and in companies that trade heavily with Japan.
I post this opinion on general observations as a long-time foreign resident in Japan. Few Japanese companies will pass on savings when the Yen appreciates, such as now when the Yen is at around the 83 yen to the US dollar. If and when the yen depreciates, Japanese companies would find that raising prices would meet with a lot of resistance.
However, COSTCO passes on more savings than most other direct import companies, IMO. The Amagasaki City COSTO has become increasingly crowded. My wife says that people go in 'groups' as way to share a single membership.
The most active Japanese Yen trading hours are from Tokyo's opening market hours (7:00PM ET / 0:00 GMT), JPY Economic News (7:30 ET / 0:30 GMT) and U.S. Economic news (8:30AM ET/ 13:30 GMT).
The key Yen currency crosses are
Interest Rates are Very Important for USD/JPY. The graph below shows how USD/JPY tracks the 3 Month LIBOR rate for the U.S.
Central Bank - The Bank of Japan conducts monetary policy meetings 12 times a year and their decisions on interest rates could have significant ramifications for the currency market. Masaaki Shirakawa is the Governor of the Bank of Japan, a post he took in April 2008. BoJ Governors typically serve a 5 year term.
Most Active Trading Hours – We tend to see the most significant volatility in the Japanese Yen when the Tokyo trading session opens. Japanese economic data is usually released between 6:50pm – 1:00am ET or 0:30 – 6:00 GMT. USD/JPY could also see big moves when U.S. economic data is released.
What Does the Economy Rely On? – Japan is the second largest economy in the world after the United States. Despite the export dependent nature of the country, the service sector accounts for more than 70 percent of the overall economy. This includes banking, insurance, telecommunications, and real estate. However Japan is also the home of many multinational companies and therefore exports are very important which is why the Bank of Japan favors a weaker currency.
Who Does the Economy Rely on for Trade? – The U.S. is Japan’s largest trade partner, but China comes in close. More specifically, the U.S. is Japan’s largest export partner but China is their largest import partner.
Market Moving Economic Releases – Central bank rate decisions are usually the most market moving indicators, which means that they can create the greatest volatility for any currency followed by the employment report, the consumer spending and inflation reports.
The Japanese Economy is comprised of 72.1% Services, 26.4% Industrial, and 1.4% Agriculture. It's largest trading partners are US, China, South Korea, Taiwan and Hong Kong. Some other key facts about the Japanese Economy:
|2008 GDP Estimate||USD $4.84 Trillion|
|Trade Balance^^^||JPY -¥132.9 billion|
^As of March 2009 ^^As of April 2009 ^^^ May 2009