The currency of choice for the third-largest world economy, USD/JPY is the second-most traded currency pair globally. In this article, we discuss key features of the yen and how they can be applied to your trading.
Introduction to the Japanese yen (JPY)
USD/JPY is the second-most traded currency pair in the currency market
One of the seven major currency pairs, USD/JPY has many interesting attributes. Not only is USD/JPY the second-most traded currency pair globally, at 18% of currency market volume, USD/JPY is renowned for its high level of market liquidity, meaning that movements in price can be more consistent and stable when compared to other currency pairs.
As an example, currency pairs like EUR/JPY and GBP/JPY have a much lower level of market liquidity, so price action is likely to be more erratic, which may be less suitable for traders with less experience.
Japanese yen volume compared to other pairs. Source BIS. Past performance is not indicative of future results.
The Japanese yen: A popular safe haven asset
In modern times, the Japanese yen is typically seen as a 'safe haven' asset.
Consistently maintaining both a current account surplus and a low inflation rate, the Japanese financial system is said to be relatively stable compared to other global economies, which helps the yen maintain its 'safe haven' status.
In periods of economic uncertainty, the yen is likely to increase in value; those looking to avoid risk will buy the yen and sell other 'riskier' currencies.
By contrast, when the market is stable and risk tolerance increases, safe haven currencies, including the yen, are likely to be sold as the market looks to buy-and-hold currencies with a higher interest rate.
The chart below compares the price action of the S&P 500 to both USD/JPY and EUR/JPY respectively. When the S&P 500 decreases in value, the value of the yen rises as the market reduces risk exposure.
Price action comparison between EUR/JPY, USD/JPY and S&P 500 (2017-2019). Source TradingView. Past performance is not indicative of future results.
US and Japanese bond prices: How do they affect USD/JPY?
The difference between US and Japanese bond prices can sometimes influence the performance of USD/JPY.
In the following chart, as an example, you can see that when the US 10-year bond yield is subtracted from the Japanese, price action correlates somewhat versus that of USD/JPY.
Comparison between US and Japan 10-year bond yields vs USD/JPY (2017-2019). Past performance is not indicative of future results.
How can BoJ monetary policy affect USD/JPY?
In regards to monetary policy, the choices of the Bank of Japan (BoJ) significantly influence both the market outlook and the performance of the Japanese yen.
Generally, any decision deemed to be 'tightening' of monetary policy is likely to increase the value of the Japanese yen; when monetary policy is tightened, stock markets are expected to endure some selling pressure, contributing to higher demand for the yen as a means of risk aversion.
On the other hand, the 'easing' of monetary policy can be expected to have the opposite effect on the yen price. In this scenario, the priority of the BoJ is usually reducing inflation to a target of 2%.
That said, the same monetary policy decision may cause the market to react in a range of different ways, depending on the current stage within the economic cycle.
When trying to analyse the yen fundamentally, understanding the latest policy information from the Bank of Japan can prove invaluable.
Trading yen-related financial products with OANDA
Frequently asked questions
One of the seven major currency pairs, USD/JPY has many interesting attributes. Not only is USD/JPY the second-most traded currency pair globally, at 18% of currency market volume, USD/JPY is renowned for its high level of market liquidity, meaning that movements in price can be more consistent and stable when compared to other currency pairs.
In modern times, the Japanese yen is typically seen as a 'safe haven' asset.
Consistently maintaining both a current account surplus and a low inflation rate, the Japanese financial system is said to be relatively stable compared to other global economies, which helps the yen maintain its 'safe haven' status.
In periods of economic uncertainty, the yen is likely to increase in value; those looking to avoid risk will buy the yen and sell other 'riskier' currencies.
This article and its contents are intended for educational purposes only and should not be considered trading advice.
