USD/JPY (U.S. Dollar/Japanese Yen): Explaining the Currency Pair

What Is USD/JPY (U.S. Dollar/Japanese Yen)?

USD/JPY is the abbreviation used to denote the currency exchange rate for the U.S. dollar and Japanese yen. The currency pair shows how many Japanese yen (the quote currency) are needed to purchase one U.S. dollar (the base currency). The symbol for the Japanese yen (JPY) is ¥. 

Key Takeaways

  • USD/JPY is the ticker used to denote the currency exchange rate for the U.S. dollar and Japanese yen.
  • USD/JPY is one of the most liquid and traded currency pairs in the world.
  • USD/JPY tends to have a positive correlation with USD/CHF because the yen and the Swiss franc are both currencies traditionally viewed as safe havens by investors.

Understanding the USD/JPY (U.S. Dollar/Japanese Yen) Pair

The value of the USD/JPY pair is quoted in Japanese yen per one U.S. dollar. For example, if the pair is trading at 150 it means that one U.S. dollar can be exchanged for 150 yen. Japan's status as the world's third largest national economy and a major exporter has made USD/JPY one of the most liquid and heavily traded currency pairs in the world.

The USD/JPY is affected by factors that influence the value of the U.S. dollar and the Japanese yen, in relation to each other and to other currencies. The interest rate differential between the policy rates of the Federal Reserve and the Bank of Japan (BoJ) is an important influence on the USD/JPY exchange rate. Higher interest rates make a currency relatively more attractive because they allow owners of assets denominated in that currency to earn a higher yield.

For example, if the federal funds rate were to increase from near zero to 2% while the BoJ's policy rate remained near zero, the dollar would tend to strengthen against the yen because investors could now earn a significantly higher yield in dollar-denominated money markets.

In fact, the yen fell to a 24-year low against the dollar in mid-2022 when the BoJ refused to follow other central banks in raising interest rates. Japan's central bank and government continued to view deflation that has gripped the country for decades as a bigger threat than near-term inflation stemming from higher energy prices.

A Safe Haven

Japan's low domestic interest rates amid deflation turned the yen into a safe haven currency, meaning that its value has tended to rise during periods of market turmoil. At times of market stress, the flow of Japanese investment funds into higher-yielding foreign currencies like the U.S. dollar has tended to reverse, appreciating the yen against the dollar. This was evident during the Great Recession, which caused the USD/JPY rate to go from 120 in 2007 to less than 90 by 2009.

Conversely, the yen has tended to weaken when risk appetite in financial markets increases. In the years after the Great Recession, the yen slowly depreciated against the U.S. dollar as the global economy recovered. The weakening accelerated in 2013 when the Bank of Japan embarked on large-scale quantitative easing.  

USD/JPY Correlations

The USD/JPY tends to have a positive correlation with USD/CHF because, aside from the fact that both currency pairs feature the U.S. dollar as the base currency, the Swiss franc is the other currency with traditional safe haven appeal among investors. On the flip side, USD/JPY is negatively correlated with the price of gold. As USD/JPY fell during the Great Recession, gold prices soared.

The USD/JPY currency pair has traditionally had a close and positive correlation with U.S. Treasury yields.

Article Sources
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  1. Bloomberg. "Yen Slides to Two-Decade Low, Reigniting Focus on Intervention."

  2. Asian Development Bank Institute. "The Bank of Japan's Super-Easy Monetary Policy From 2013-2018." Page 1.

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