How to Trade the USD/JPY

Discussions of Japan trying to beat deflation with a bold monetary and flexible fiscal policy have characterised 2023. On June 2, 2023, the Japanese government vowed to work actively to beat deflation. The forex market is the quickest to absorb and react to such news and the USD/JPY (US dollar/Japanese yen) is the second most traded currency pair, drawing 13.5% of the global forex trade. A changing and rather transformative Japanese economic outlook is bound to impact this market.

For traders, this brings multiple opportunities, generated by changes in the Japanese and American monetary policies. The starting point is to learn what moves the Gopher, the nickname for the USD/JPY pair. For effectively trading any forex pair, it is important to understand the factors that move the currencies in the pair. This guide offers insights into trading the USD/JPY.

What Moves the USD/JPY?

Japan is one of the oldest major economies. The country has witnessed multiple long spells of deflation since the 1990s. So much so that the land of the rising sun totally skipped the global trend of interest rate hikes in 2022. While traders have for long considered the Japanese yen a safe haven, its popularity has threatened the country's trade surpluses. On the other hand, this is what made the currency popular among traders in the first place. But since 2021, the currency has been on a downward trajectory, and trading strategies for this major currency pair have dramatically changed. Below are the factors that impact the pair.

Major Economic Data Releases from Japan

The economic data of a nation reveals its economic health, and hence, investor sentiment. This gives direction to the currency. Updates on the GDP, retail sales, inflation, industrial production and trade deficit are critical for the export-oriented Japanese market and are key movers of the Japanese yen. Data releases of an economy impact the domestic currency. For instance, an increase in GDP exerts upward pressure on the currency, while a decline in the number of job opportunities can weigh it down.

  • The population census of the aging nation is another important report. This is because Japan has a poor birth rate and a shrinking workforce. Japan even opened its doors again for migratory workers in 2017, in an attempt to push economic growth. Keeping an eye on such governance moves helps traders speculate on the direction of currency moves effectively.

  • The inflation in the country has remained lower than the global levels for a long time. Any uptick in this rate triggers economic activity and lends support to the currency. However, a decline spells weakness for JPY.

Economic Data from the US

Economic reports from the US, such as GDP, inflation data, Fed interest rate decisions and non-farm payrolls data, invariably impact the Gopher. A positive outlook for the American economy boosts the dollar, causing the Gopher to fall, while a negative outlook helps lift the forex pair.

Tankan Survey

The Bank of Japan (BoJ) releases information on business confidence every quarter. This is known as the Tankan Survey, the Japanese abbreviation for the Short-Term Economic Survey of Enterprises in Japan. It significantly impacts the Japanese currency and stock markets. Since Japan is one of the most technologically advanced economies, measures of the health of sectors such as automobiles, electronic goods and innovations are of primary concern among traders.

The simplest way to use the survey is to calculate DI, which is the difference between businesses reporting unfavourable conditions and those reporting favourable business conditions. The result may range from -100 to 100. A negative DI suggests optimism in the market and a growth outlook, which causes Japanese yen to appreciate. A negative value, on the other hand, indicates economic pessimism and growth contraction, leading to a decline in the value of yen.

Carry Trades

Did you know that the Japanese yen and the BoJ policy decisions drive the global carry trade? Persistently low and often negative interest rates in Japan attract traders from across the globe to borrow and invest money in high-yielding assets. Therefore, Japan is a major source of capital for carry trade. However, a combination of zero or negative global interest rates and low borrowing costs in Japan weigh the yen down, as traders prefer to liquidate it in favour of higher-yielding assets.

Weak risk appetite in the global financial markets is also known to exert downward pressure on the yen. Attempts by the government to eradicate deflation may have ripple effects on the Japanese economy and global carry trade.

The Interest Rate Differential between the Federal Reserve and the Bank of Japan

In 2022, economies across the globe hiked interest rates to curtail inflation. However, Japan maintained low rates as policymakers welcomed inflation as a sign of economic growth. This, however, resulted in the yen losing its safe haven status, declining throughout the year.

The BoJ, known to sell the yen to keep trade more competitive and maintain a trade surplus, intervened twice in 2022. It purchased the currency against the dollar, in stealth mode, for the first time in 24 years. Due to global recessionary fears, the move failed to lend support to the declining yen, which slid below $150 soon after.

Traders look out for such interventions by the BoJ because they directly impact the USD/JPY forex pair. They help the currency pair rally, even if it is for a short duration. These occasions are great for short-term traders. Plus, trading CFDs allows traders to take advantage of market movements in either direction, improving the number of opportunities.

To Sum Up

  • The USD/JPY is affected by economic news releases from the US and Japan.
  • The JPY has long been considered a safe haven in the trading community and loses traction when risk appetite is high.
  • Low interest rates in Japan fuel global forex carry trade.
  • The Japanese government's attempts to reverse deflation may stir the currency markets.
  • The interest rate differential between the US and Japan impacts the forex pair.
  • The Tankan Survey is a quarterly insight into the Japanese economy that experienced traders keep an eye on while making trading decisions.



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