How connected are the economies of Japan and the United States? For the month of July 2010, Japan ranked as the fourth largest U.S. trading partner - behind Canada, China and Mexico - with combined exports and imports of $15 billion. That figure breaks down into exports to Japan of $5 billion and imports of $10 billion, equating to a negative balance of trade of $5 billion (12% of the U.S. total of -$42.8 billion).

With all that money changing hands every month, the relative value of the Japanese yen to the U.S. dollar is very important to American investors and consumers. (For a background, see The U.S. Dollar And The Yen: An Interesting Partnership.)

IN PICTURES: Top 6 Most Tradable Currency Pairs

Recent Events
On September 15, 2010, the dollar dipped below 83 yen for the first time in 15 years. This followed a steady five-month climb of the yen from a level of over 94 yen to the dollar. Currency talk can get a little confusing, but the standard practice is to talk about every currency in relation to how many units it takes to buy one U.S. dollar. So, in this case the yen went from requiring 94 yen to buy $1 to 83 yen to buy $1 - a rise in the value of the yen even though it appears as a numerical countdown from 94 to 83.

In reaction to this rise, Japan's finance ministry intervened in the foreign exchange markets by selling the yen, resulting in a drop back to the 85 yen to $1 level and a bullish move on the Japanese stock market. A weaker yen bodes well for Japanese exporters as Americans get more bang for their buck when buying Japanese products.

The day before the intervention, Prime Minister Naoto Kan overcame an internal challenge to his leadership of the ruling Democratic Party. His expected victory over Ichiro Ozawa helped push the yen to its recent highs.

Stock Markets
The Nikkei responded favorably after the intervention by jumping more than 2% that day. The strong yen had been hurting Japanese exporters who were concerned that further job losses were inevitable if something wasn't done soon.

Japanese trade minister Masayuki Naoshima said that corporations would suffer if the trend continued since they had been assuming an exchange rate of 90 yen to the dollar, five points higher than after the intervention. According to Naoshima, an exchange rate any lower than that puts the profitability of many Japanese companies in jeopardy. This raises the question of whether additional government intervention is on the horizon.

The move had the opposite effect in the Far East as markets dropped in South Korea, Hong Kong, China and Australia. In the U.S., the DJIA rose 0.6% points during the two days following the announcement while the dollar rose 3%.

IN PICTURES: Top 10 Forex Trading Rules

U.S. Companies
A weaker yen exacerbates the U.S. trade deficit by making U.S. exports more expensive. It makes imports from Japan more appealing to U.S. consumers, which will benefit Japanese auto and electronics manufacturers. This is bad news for the American car companies that are struggling to dig out of debt and recover from a prolonged recession. The currency intervention came on the heels of General Motor's announcement a month ago that it had filed for an IPO.

A weaker yen will hurt American companies that derive much of their revenue from exports to Japan, but lower costs for companies that import machinery and parts. The impact on companies that do business internationally is muted by their exposure to multiple currencies and the worldwide economic downturn.

Most American companies that have a significant presence in Japan operate in yen and pay expenses in yen. The relative strength of the yen has little economic effect on these companies until they have to convert their financial results into dollars for GAAP reporting. At that point, growth rates may be distorted if there has been a shift in currency valuations.

Currency Trading
The door to foreign exchange (Forex) is open to the average investor. You now have the ability to take advantage of currency fluctuations through various methods, including a brokerage trading account, foreign currency CDs, exchange-traded funds and foreign bonds and mutual funds.

You can take long or short positions in the yen or dollar based on how you expect the currencies to perform relative to each other. If one currency is rising, the other must be falling, so there are continuous opportunities to trade in either direction. If you are new to this market, consult a broker who is experienced in currency trading before diving in. While the rewards can be high, you should understand all the risks first. (To learn more, check out How To Pay Your Forex Broker.)

The Bottom Line
The movement of currencies is subject to many factors, but like stocks, the amount of movement is usually greater when the latest news is bad. Whether you trade currencies or own stocks with large international exposure, the value of your investments can react to events both in the U.S. and Japan. The global economy is a reality, and your portfolio must be viewed in that context. Manage your investments with an eye on breaking news from around the world. (For an indepth look at the world's currencies, see the Investopedia Forex Walkthrough.)

For the latest financial news, check out Water Cooler Finance: The End Of The Recession.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  2. Markets

    The 5 Biggest Chinese Natural Gas Companies

    Read about the top five Chinese natural gas companies as measured by gas production volume and learn a little more about their business operations.
  3. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  4. Markets

    The 5 Biggest Chinese Insurance Companies

    Read about the top Chinese insurance companies by market capitalization, and learn a little about their positions in the marketplace.
  5. Investing

    Slow Growth in China to Affect Asia-Pacific

    As China's growth slows, it will affect different countries in the Asia-Pacific region differently.
  6. Investing

    3 Reasons Why Countries Devalue Their Currency

    Ever since world currencies abandoned the gold standard and allowed their exchange rates to float freely against each other, there have been many currency devaluation events that have hurt not ...
  7. Investing News

    How The Devaluation of the Yuan Hurts the Russian Economy

    With oil and gas comprising the majority of Russia’s exports and China serving as its largest trading partner, a devalued yuan signals the weakening Chinese economy will demand less energy while ...
  8. Economics

    Is a Recession Coming?

    In the space of a week, the VIX Index, a measure of market volatility, spiked from 13, suggesting extreme complacency, to over 50, evidencing total panic.
  9. Forex Strategies

    These Are The Best Hours To Trade the Euro

    Six popular currency pairs and numerous secondary crosses offer euro traders a wide variety of short- and long-term opportunities.
  10. Investing News

    September Starts With 8% Drop in Oil Prices

    Oil started September with a steep decline of more than 8% amid recent reports from China pertaining to their weak manufacturing data
RELATED TERMS
  1. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
  2. Brazil, Russia, India And China ...

    An acronym for the economies of Brazil, Russia, India and China ...
  3. Optimal Currency Area

    The geographic area in which a single currency would create the ...
  4. European Sovereign Debt Crisis

    A period of time in which several European countries faced the ...
  5. Transfer Risk

    The risk that a local currency cannot be converted into the currency ...
  6. Asian Infrastructure Investment ...

    The Asian Infrastructure Investment Bank (AIIB) is an international ...
RELATED FAQS
  1. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. What kinds of costs are included in Free on Board (FOB) shipping?

    Free on board (FOB) shipping is a trade term published by the International Chamber of Commerce or ICC, that indicates which ... Read Full Answer >>
  4. What are the differences between B-shares and H-shares traded on Chinese stock exchanges?

    Equity listings in China generally fall under three primary categories: A shares, B shares and H shares. B shares represent ... Read Full Answer >>
  5. What are the differences between H-shares and A-shares on Chinese and Hong Kong stock ...

    Publicly trade companies in China generally fall under three share categories: A shares, B shares and H-shares. A-shares ... Read Full Answer >>
  6. Why are financial markets considered to be transparent?

    Financial markets are considered transparent due to the fact it is believed all relevant information is freely available ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!