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WIKI ANALYSIS
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This article describes a currency traded on the global foreign exchange market. View articles referencing this currency. |
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.[1] It is denoted with a leading ¥. For example, ¥500 is read "five-hundred Yen".
The chart at left shows the USD/JPY currency pair; the number of Japanese Yen equivalent to 1 U.S. Dollar (USD).
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 rise above ¥90 per dollar.[2]
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.
Factors affecting the Value of the Yen
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.
Central Bank Policy
The Bank of Japan, the country's central bank, maintains a policy of keeping the yen weak against other major currencies in order to spur exports and help economic growth in Japan.
The collapse of the Japanese asset bubble in the late 1980s led to a period of stagnant economic growth in Japan; for most of the 1990s, Japan's real GDP growth hovered around zero percent per year. In addition, between 1986 and 2003, the Nikkei 225, Japan's main stock index, declined by 80% from 38,916 to 7,603. The situation has improved since 2003 and Japan posted an average GDP growth of 2% between 2003 and 2007.[3]
The recovery was aided by a strong export sector. In the 1st quarter of 2008, Japanese exports grew by 19.5% (annualized). Since, a strong currency hurts the export sector by making Japanese goods more expensive to foreigners. The Bank of Japan has actively tried to help Japanese exports by keeping the value of the Yen low. For example: in 2003-04, the Bank of Japan sold ¥35 trillion to prevent a rise in the yen.[4]
A decade of relaxed monetary policy has caused a particularly unique situation in Japan. The primary monetary tool for the Bank of Japan is the over-night interest rate. As of November 2008, this rate stood at 0.3%. The bank cannot reduce the interest rate below 0% and thus its monetary toolkit is limited to using other unconventional policies.
Current Account Balance
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.
Interest rates and carry trade
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.[7] 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).[8]
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
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.
Investing in the Yen
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.
Companies that benefit from a stronger Yen
Companies that benefit from a weaker Yen
- Toyota Motor: The Japanese automaker is the World's largest vehicle manufacturer in terms of total production. A weaker yen benefits Toyota by making its products cheaper to consumers around the world. Toyota bases its earnings on an exchange rate of ¥105 per dollar. According to the Economist magazine, every ¥1 appreciation against the dollar costs the firm ¥35 billion in annual operating profit.[10]
Exchange Rates
U.S. Dollars per Japanese Yen
Japanese Yen per Euros
Euros per Japanese Yen
Forex Markets [11]
Trading Hours
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).[11]
USD/JPY 10 Year Chart
Key Currency Crosses
The 3 key currency crosses are
Things to know when trading the Japanese Yen (JPY)
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 7:30pm – 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.
Japanese Economy [11]
Key Facts
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:
- Second most actively traded currency
- Widely considered the Proxy for Asia
- Suffered from a 10 Year Recession from the 1990’s to 2000’s
- Highly Dependent on Exports
- BoJ has a history of intervening in Currency Markets
General Economic Statistics
| 2008 GDP Estimate | USD $4.84 Trillion |
| Population: | 127 Million |
| Interest Rate^ | 0.10% |
| Inflation^^ | -0.30% |
| Trade Balance^^^ | JPY -¥132.9 billion |
^As of March 2009 ^^As of April 2009 ^^^ May 2009
Market Moving Economic Releases
- BoJ Interest Rate Decision
- Retail Sales
- Consumer Prices
- Tankan Report
- GDP (Gross Domestic Product)
- Corporate Goods Price Index
- Merchandise Trade Balance
- Eco Watchers Survey
References
- ↑ Triennial Central Bank Survey (April 2007), Bank for International Settlements.
- ↑ Economist.com, Retrieved November 7, 2008
- ↑ Economist.com, Retrieved November 7, 2008
- ↑ New York Times, Retrieved November 7, 2008
- ↑ Ministry of Finance: Japan, Retrieved November 7 2008
- ↑ Bank of Japan Statistics, Retrieved November 6, 2008
- ↑ Bank of Japan Statistics, Retreived November 6, 2008
- ↑ Global Money Trends, Retrieved November 6 2008
- ↑ Bureau of Statistics, Retrieved November 6, 2008
- ↑ Economist.com. Retrieved November 7, 2008
- ↑ 11.0 11.1 11.2 FX360.com, Japanese Yen (JPY) Factsheet by Kathy Lien
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