Forex Currencies: The USD/JPY
By Brian Perry
The Japanese economy is the largest economy in
The Japanese Economy
A small country with little in the way of natural resources, Japan has relied on a strong work ethic, innovative manufacturing techniques, a mastery of new technologies, a high national savings rate, and a close partnership between the government and business sectors to overcome its natural disadvantages. Although the country and its economy were severely damaged during the World War II, the Japanese economy has since grown to become larger than that of every country in the world except the
However, following more than 40 years of nearly unprecedented economic growth, the early 1990s saw an end to the Japanese bull markets in domestic equities and real estate. The bursting of these bubbles led to a sharp economic slowdown and a deflationary spiral. The Japanese banking system was saddled with trillions of yen in bad loans and subsequently cut back its financing activities. Japanese consumer spending also slowed as the country entered a prolonged economic downturn. For nearly two decades, the Japanese government has struggled to reinvigorate the economy and return growth to its previously robust rates. Although these efforts have not yet been completely successful, Japan has become an economic powerhouse and an important source of global economic activity. (For background reading, see The Lost Decade: Lessons From Japan's Real Estate Crisis and Crashes: The Asian Crisis.)
The Japanese Yen
The Japanese yen is the most heavily traded currency in
One consequence of
Trading the U.S. Dollar/Japanese Yen
The U.S. dollar/Japanese yen pair features low bid-ask spreads and excellent liquidity. As such, it is an excellent starting place for newcomers to the currency market as well as a popular pair for more experienced traders. One of the attractions of currencies is that the market is open 24 hours a day, five-and-a-half days a week. U.S.-based investors who enjoy trading at night might consider focusing on the U.S. dollar/yen because the yen is heavily traded during Asian business hours. (For more insight, see In the forex market, how is the closing price of a currency pair determined?)
As previously discussed, selling the yen as part of the carry trade has often been a popular strategy. The popularity of the yen carry trade usually depends on the state of the global financial markets. When there are many opportunities available in global financial markets and volatility is relatively low, traders see the yen carry trade as a great way to make money. However, when volatility increases or there are fewer opportunities available to global investors, the yen carry trade declines in popularity. Therefore, a key factor that traders of the U.S. dollar/yen pair need to analyze is the current popularity of the carry trade among global hedge funds and other institutional investors. During relatively calm periods, the carry trade is extremely popular, and the resultant selling pressure can cause the yen to weaken. When global market volatility increases, the popularity of the yen carry trade fades. As traders reverse the carry trade, they need to purchase the yen. This buying pressure can lead to a general upward trend in the yen relative to the U.S. dollar or other currencies.
Another factor to be aware of when trading the yen is
As the most liquid currency in
Finally, it is important for traders to remember that
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