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Japanese Yen Explained: Its History and How to Trade It

Among the seven major currencies that dominate the global forex market, the yen emerges as the third most traded, trailing only behind the US dollar and the Euro. These currencies make up 83% of the forex market, highlighting the significant role of the yen in international trade and foreign exchange trading.

An illustration of the Japanese yen currency symbol.

Main Points:

  • The introduction of the yen in the late 19th century was part of Japan's modernization, moving from a fragmented currency system to a unified national currency
  • The Japanese yen (¥) is the 3rd most traded currency in the forex market, playing a crucial role in international trade and finance
  • The Yen is used in carry trades, as a safe-haven, and serves as a global reserve currency
  • The Plaza Accord, the Asian Financial Crisis, the 2011 Earthquake and Tsunami, and the COVID-19 pandemic have all significantly influenced the yen's value and Japan's economy
  • Traders and investors can gain exposure to the yen through the forex market, futures market, and ETFs

What Is the Japanese Yen

The Japanese yen, abbreviated as JPY and symbolised by ¥, is the official currency of Japan, an island nation in East Asia with the fourth-largest economy in the world (as of 2023) by nominal Gross Domestic product (GDP). Furthermore, the yen plays a major role in global finance due to its status as a reserve currency.

The symbol for the yen, which resembles a capital letter “Y” with two horizontal dashes, is a representation used worldwide.

The term "yen" itself has an interesting origin, meaning "round" or "circle" in Japanese. This name was chosen to reflect the shape of Japan's coinage. Although the correct pronunciation in Japanese is "en," it is widely pronounced and spelled as "yen" in English, adapting to the phonetic preferences of English speakers.

History of Japanese Yen

The Japanese yen, established during the late 19th century by the Meiji government, was a key part of Japan's modernization efforts.

Japan aimed to unify the country under a single currency, inspired by the European Decimal Monetary System. Before this, Japan had a fragmented currency system where each feudal area issued its own money, known as Hansatsu, with no standard denomination.

The New Currency Act of 1871 marked the yen's introduction as Japan's official currency, leading to the consolidation of currency issuance under the newly created Bank of Japan in 1882.

Post-World War II, the yen experienced significant devaluation. In 1944, to help the Japanese economy recover after World War II, an agreement called the Bretton Woods Agreement fixed the value of the yen at 360 yen for every 1 US dollar. This fixed rate lasted until 1971 when the agreement ended, and the yen was allowed to float freely. During this period, in the 1970s, the yen's value fluctuated notably during the oil crisis, which led to periods of deflation and appreciation.

Since 1973, the Japanese government has been actively involved in the market intervention of its currency exchange rate, known as the 'Dirty Float' regime.

Historic Events of the Japanese Yen Under the Dirty Float Regime

Several key events have significantly influenced the Japanese yen and the country's economy under the Dirty Float regime:

  • Plaza Accord (1985): This agreement made the Yen much stronger against the US dollar. By 1995, it was nearly as valuable as the dollar. This rapid increase in the yen's value meant that when measured in dollars, Japan's economy in terms of GDP became almost as big as the US economy.
  • Asian Financial Crisis (1997): This crisis weakened the Yen, causing a recession in Japan. As a result, the government stepped in to aid economic recovery.
  • Earthquake and Tsunami (2011): These disasters adversely affected Japan's economy and the Yen. The government had to step in again to help.
  • COVID-19 Pandemic (2020): This global crisis initially weakened the demand for Yen as a safe haven due to the uncertainties. The Yen's value has been up and down since the pandemic and the effects are still being felt.

Overview of Japan's Economy

Japan's economy is recognized as the fourth-largest in the world by GDP trailing behind the United States and China. Japan's economy is very developed and advanced, and it is regarded as the East Asian model. Despite its impressive attributes, Japan also faces significant challenges.

Economic Strengths of Japan:

  • Production: Japan excels in manufacturing, particularly high-tech and precision goods like robots and hybrid cars. It's the world's second-largest carmaker and holds the top spot in the Economic Complexity Index.
  • Finance: Japan is the world's largest creditor nation, with massive financial assets and a significant trade surplus. This translates to a high quality of life for its citizens.
  • Innovation: Japan consistently ranks among the most innovative countries, leading in technological advancements and global patent filings. In 2022, 47 companies headquartered in Japan made it onto the Fortune 500 list.
  • Global Player: Japan actively participates in the global market, ranking fourth in both imports and exports (in 2021). It also boasts the fifth-largest stock exchange by market capitalization.

Challenges Faced By the Japan Economy:

  • Shrinking Workforce: Japan faces a demographic crisis with an aging and declining population. This threatens its manufacturing prowess and economic growth potential. The population in Japan, which was at its highest at 128 million in 2010, fell to 125.5 million in 2022 and is anticipated to drop below 100 million by the middle of the 21st century.
  • Debt Burden: The government's response to national crises has led to massive public debt, exceeding 260% of its GDP, the highest among developed nations.
  • Lost Decades: The asset price bubble burst in the early 1990s plunged Japan into a period of economic stagnation, known as the "Lost Decade". This legacy continues to impact growth.
  • Competition: Competition from China and South Korea continues to pressure Japan's manufacturing dominance, forcing it to constantly adapt and innovate to maintain its economic relevance.

The Role of the Yen in the Global Economy

The Japanese Yen plays a multifaceted role in the global economy. This extends beyond its domestic function as a national currency. Some key aspects of its international influence include:

  1. Carry Trade:
    Investors often borrow low-interest Yen to buy higher-yielding foreign assets, like bonds or stocks . This strategy is known as "carry trade." Carry trades create demand for the Yen, boosting its value. However, when markets turn sour, investors rush to sell their Yen, causing its value to drop. This volatility can be both beneficial and risky for the Japanese economy.
  2. Safe-Haven Status:
    During periods of economic uncertainty, investors seek refuge in Yen-denominated assets because Yen is often seen as a due to its stable and mature economy. This can be helpful for Japan during crises, but a strong Yen can also hurt exports because they become expensive for foreign buyers.
  3. Hedging Tool:
    The Yen's low-interest rates and relatively stable economy make it an attractive hedge against potential downturns in other major economies like the US. Investors and traders often use the Yen to offset potential losses in other currencies. This is primarily because the Yen is less expensive than the currencies from other leading developed countries.
  4. Global Reserve Currency:
    While not as dominant as the US dollar, the Yen still holds a significant position in global foreign exchange reserves. The currency continues to play a major role in global trade, it represents more than 4% of all global reserves. This means other countries hold Yen as a backup currency, further solidifying its international presence.
  5. Impact on Japanese Economy:
    The Yen's value directly impacts Japan's trade and economic activity. If a currency is considered to be a safe-haven, demand for that currency increases the currency value, consequently pushing its value upward. A strong yen can make exports more expensive, while a weak yen can boost exports but hurt domestic purchasing power. The Bank of Japan (BoJ) carefully intervenes in the market to balance these competing interests.

Trading the Japanese Yen

From multinational banks to individual traders, varying market participants around the world are actively trading the Japanese Yen (JPY). Here are some of the markets providing exposure to speculate on the value of the Japanese Yen.

  1. Forex Market

    The forex market is where people can buy and sell currencies like the Japanese yen against other currencies like the US Dollar, British Pound etc.

    In the foreign exchange market, you can trade the Japanese Yen's (JPY) value against the value of other currencies without actually swapping or owning currencies. This is done by trading contracts for differences (CFDs) on forex pairs like USD/JPY (US dollar vs. Yen), GBP/JPY (British pound vs. Yen), and AUD/JPY (Australian dollar vs. Yen).

    When you trade yen forex CFDs, you're making a deal with a broker to make a profit or loss from the difference in the opening and closing price of your trade. CFDs allow the use of leverage to open larger positions which can magnify both potential profits and losses.

    To trade CFDs on the yen currency pairs, you may consider opening an account with a CFD broker like Plus500.

  2. JPY Futures and Options Market
    The futures market is a place where people can agree to buy or sell the Yen at a future date for a price that you agree on now, known as the strike price. The future date when the agreement has to be settled is known as the expiration date.

    Another way to speculate on the Yen futures market is through ‘options.’ Options give you the right, but not the obligation, to buy or sell Yen at a certain price on or before the option expiration date.

  3. Yen futures can be traded on platforms like the Plus500US futures market or the Chicago Mercantile Exchange, also known as the Merc.

  4. Japanese Yen ETFs

    Individuals looking to gain exposure to the Japanese Yen without dealing directly with the currency market may do so with exchange-traded funds (ETFs). Yen ETFs are financial derivatives that track the value of the Japanese yen against the U.S. dollar or a mix of global currencies.

    Two well-known Japanese yen ETFs include:


    1. ProShares UltraShort Yen: This ETF aims to deliver results that are twice the opposite of the yen's daily performance against the U.S. dollar. It has an expense ratio of 0.95% and manages about $24.45 million in total assets.
    2. Invesco CurrencyShares Japanese Yen Trust: This ETF seeks to track the yen's price directly by holding actual yen deposits. It has an expense ratio of 0.40% and approximately $82.51 million in total assets.

Most Volatile Japanese Yen Currency Pairs in the Forex Market

Some Japanese yen (JPY) currency pairs are more volatile than others, offering traders more opportunities to trade. Yet, certain JPY pairs consistently show volatility. They include the following currency pairs:

  1. USD/JPY:
    The USD/JPY currency pair, is nicknamed "The Ninja". It is a combination of two of the most traded currencies in the world, the US dollar as the base currency and the Japanese yen as the quote currency. The pair holds a significant position in the foreign exchange market and is second only to the EUR/USD in trading volume. The price movement of USD/JPY usually expands over 50 to 100 pips per day.
  2. GBP/JPY
    The GBP/JPY currency pair, nicknamed "The Beast or Dragon" is a combination of the British Pound and the Japanese yen. The nickname is due to the extreme volatility of the pair. Therefore, it should be approached with caution and solid risk management. As a result of its notable volatility, the average daily range (ADR) of GBP/JPY price movement tends to expand up to 200 pips.
  3. EUR/JPY
    Among the most actively traded currency pairs in the forex market, EURJPY ranks among the top 10 and makes up about 3% of trading volume globally. The pair is known for its volatility with an ADR of approximately 70 to 150 pips.
  4. AUD/JPY and NZD/JPY
    Currency pairs like AUD/JPY or NZD/JPY let you make predictions on how the value of the Japanese Yen (JPY) will change compared to the Australian Dollar (AUD) or New Zealand Dollar (NZD).

    Australia and New Zealand are major exporters of commodities like iron ore, gold, and copper. This makes AUD/JPY and NZD/JPY crosses susceptible to volatility in commodity prices. Both crosses have an average daily range of 80 to 150 pips

  5. CAD/JPY
    The Canadian dollar paired with the Japanese yen, known as CAD/JPY, often sees significant price swings due to fluctuations in oil prices (since Canada is a major oil exporter) and important economic reports from both Canada and Japan. On a typical day, the price movement of CAD/JPY can expand approximately from 80 to 150 pips.

What Are the Major Factors Driving the Japanese Yen?

Various factors and variables continually shape the course of the Japanese yen. They include:

  • Interest Rate Differential
    The Bank of Japan usually maintains its traditional dovish policy, while other central banks do raise rates to control inflation. This differing policy has led to an interest rate gap between Japan and other developed countries like the US.
    Historically, investors use the yen for carry trades, borrowing it at low-interest rates to invest in higher-yielding assets abroad, a strategy that poses benefits and risks to the Japanese Yen.
  • Quantitative Easing (QE) and Yield Curve Control
    The Bank of Japan (BoJ) uses two main strategies, called Quantitative Easing (QE) and Yield Curve Control, to manage the value of the Japanese Yen. The BoJ buys a lot of government bonds to make sure the interest rates on these bonds stay within a certain range. This action has made the BoJ's account much bigger than similar actions taken by central banks in the U.S. or Europe, and it has made the Japanese Yen weaker compared to the U.S. dollar. If the BoJ decides to stop controlling interest rates in this way and increase rates from negative to positive, it could affect Japan's economic growth and how banks lend money.
  • Growth Differential
    he difference in economic growth between Japan and other countries, particularly the U.S. and Europe, affects the value of the Japanese Yen. Japan's economy has been shrinking, partly due to a declining population, making investors less interested in the yen compared to currencies from growing economies.
  • Trade Surplus
    Japan's trade balance, heavily influenced by its need to import energy, affects the value of its currency. High costs of imported energy have reduced Japan's trade surplus, weakening the yen. However, a decrease in energy prices and a weaker yen boosting exports could expand Japan's trade surplus, potentially strengthening the yen.

Economic Reports Affecting the Japanese Yen

Investors and traders should pay close attention to certain releases on the economic calendar that can significantly affect the value of the Japanese yen (JPY). They include:

  • Consumer Price Index (CPI): The CPI report is an important measure of inflation. Higher inflation may lead to rate hikes, which may support the yen.
  • Employment Data: Employment figures from the Japan Statistics Bureau, including the unemployment rate, may boost or decline the value of the yen.
  • Monetary Policy Announcements: Decisions on interest rates, asset purchases, and plans by the BoJ can greatly influence the yen. Unexpected changes can cause big moves in JPY currency pairs.
  • Tankan Survey: This quarterly business sentiment survey from the Bank of Japan offers insights into Japan's economic health based on how positive or negative it is.
  • Trade Balance: As a major exporting country, Japan's trade balance (the difference in its exports and imports) can affect the yen. A surplus can strengthen the yen, and a deficit might weaken it.

Conclusion

In this article, we discussed the Japanese Yen, uncovering its history, its role in the Japanese economy, and its place in the global financial landscape. We've seen how the yen has evolved from its early beginnings in the 19th century through economic ups and downs to become the third most traded currency in the world.

Understanding the yen's unique position in global finance offers valuable insights to investors and traders. In addition to knowing the different ways to trade the yen through the futures market, forex CFD market, or ETFs, it is also important to remember the key drivers that influence the yen to make informed trading decisions.

FAQs

How can I trade the Japanese Yen?

To speculate on the value of the Japanese yen, you can do so via the forex market, the yen futures market, or yen CFDs.

Which country uses the yen as its currency?

The yen is the currency that Japan uses. This yen is not the same as the yuan from China, although they share the same currency symbol.

What does "yen" mean in Japanese?

The word "yen" in Japanese means "circle." It was chosen because the first coins in Japan were round. In modern times, Japan's currency system features both coins and various denominations of paper banknotes.

What banknotes are available in Japan?

Japan has banknotes of ¥1,000, ¥2,000, ¥5,000, and ¥10,000.

How do the Japanese count money?

The Japanese often count money in multiples of 10,000 yen, unlike in the West where currencies like the U.S. dollars or euros are usually counted in multiples of 1,000.

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