The seven major currencies account for 80% of the forex market. And the Japanese yen is among those largest currencies in terms of international trade as well as forex trading.
Japan is one of the biggest economies in the world. It records among the highest GDPs among countries and it also ranks among the highest exporters.
Behind the Japanese yen is the Bank of Japan, which has the mandate to ensure the growth and minimize inflation.
However, in Japan, deflation has been a persistent threat for many years. The BOJ has pursued a policy of very low rates in the hopes of stimulating demand as well as economic growth.
Economics of the Yen
For yen traders, it is wise to first understand the particular and peculiar attributes of the Japanese yen.
For one, even though it’s among the biggest currencies in the world, Japan has been remarkably lacking in growth since its equity’s collapse and real estate bubbles in 1990.
Because of this, there has been this so-called “lost decade.” Since then, growth has rarely crossed the 2% mark between 2001 and 2011. It has even contracted to zero or negative rates many times.
The Asian country is also remarkable for inflation, which has been absent in the country for a long time. For much of the previous decade, the country has experienced deflation.
At the same time, Japan is also the second oldest major economy in the world. It also ranks among the countries that have the lowest fertility rate.
What that indicates is an increasingly aging workforce with fewer younger workers to support the economy through taxes and consumption.
Meanwhile, the country is also an advanced economy with well-educated workforce. Even though some industries have somehow immigrated to South Korea and China, Japan is still the leading manufacturer of consumer electronics, automobiles, and tech components. As a result, Japan has a massive exposure to the global economy.
What Drives the Yen?
The Japanese yen has many drivers behind it.
Major economic data items such as GDP, retail sales, industrial production, inflation, and trade balances are key items investors should follow.
They should also keep close tabs on employment figures, interest rates, and daily news. There can be natural disasters, elections, and new government policies. These can all have significant effects on exchange rates.
The Tankan survey in Japan particularly important. This is a quarterly report that comes from the Bank of Japan.
Yen-Specific Factors
Although the BOJ has maintained low rates since the property bubble collapse, it has also been involved in currency intervention.
They sell the yen to help keep Japanese exports more competitive. However, such an intervention has carried political repercussions in the past, so the bank doesn’t engage often.
Also, Japan has a large trade surplus, but it also has very large public debt along with an aging population.
Although it has high level of debts, traders usually are more comfortable with Japan’s debt balance. Further, traders typically balance the high debt level with its high surplus.
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