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Currency – Japanese Yen (JPY)

education-icon_yenThe Japanese economy is the third largest in the world. Japan is heavily reliant on exports in order to support its economy, since it does not have many natural resources.

After being heavily destroyed in World War Two, Japan focused on rebuilding its industries rather than focusing on building military strength as it did before the war. As a result the nation was able to surpass pre-war production levels by 1950. Japan proved very competitive on the international stage in the following decades, and its economic growth in the 60′s, 70′s, and 80′s was incredibly impressive.

Japan’s industrial sector expanded and exports grew at a fast pace, creating a strong economy with the help of easy access to credit through low interest rates. The Bank of Japan lowered interest rates from over 6 percent in 1990 to as low as zero percent in 1999 and they have recently been ranging between zero and 0.10 percent.

Carry Trade

Low interest rates made the yen become very attractive to investors. As a result, the Japanese currency is one of the best candidate for carry trades, especially against the Australian dollar. We have already seen how carry trades work. The low interest rates in Japan and higher rates in Australia, provide a good interest rate differential.

Importance of the Bank of Japan

Japan exports mainly automobiles, auto parts, iron and steel products, semiconductors. Exports with the rest of the world in 2012 amounted to over $801 billion. Due to the fact that Japan relies heavily on exports to support its economic growth, it is not beneficial for the nation to have a very strong currency as it would make its exports more expensive to other countries.

That is why the Bank of Japan is known for intervening in the currency markets, and has done so in the past. This is because if it thinks the yen has appreciated too much, it would intervene to weaken its value. So one way to keep the value of yen low is to keep interest rates low.

One important thing to also know about the yen is that it is perceived to be a safe haven currency, meaning that in times of financial market stress, investors tend to rush to the safety of the Japanese currency. This increase in demand for the yen will tend to increase its value. Again in such a case, the Bank of Japan will closely watch the yen to make sure it does not appreciate too much.

Based on this, it is important to watch policy decisions by the Bank of Japan.

Economic Indicators to Follow

Trade Balance

Since Japan is heavily export dependent, this is an important indicator to watch. Falling export numbers indicate a decline in economic activity. This is negative for yen.

Gross Domestic Product

It indicates whether economic activity in Japan has expanded or contracted.

Tankan Survey

A survey of managers from large Japanese industries, who are asked to give their views on the economy. A number above zero indicates rising meaning that Japanese businessmen expect business activity to pick up. This is positive for yen.

Consumer Price Index (CPI)

Depending on the rate of inflation, the Bank of Japan will undertake monetary policy. If the central bank needs to fight deflation, it will adopt easier monetary policy, which has a weakening effect on the yen.

Core Machinery Orders

Since the Japanese economy is mostly comprised of manufacturing, a large proportion of exports are made up of machinery orders. An increase in core machinery orders is therefore negative for yen.

Unemployment Rate

As with other countries, high unemployment could lead to a decline in consumer spending which will have a negative effect on economic growth.

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