Introduction
It is interesting to use what are called interest rates to analyze some currency pairs like the USD/JPY pair. To learn more about the benefits of these rates, we offer you some complementary information and practical tips to make the best use of them in your strategies.
What Is The USD/JPY Currency Pair?
USD / JPY is the abbreviation that indicates the currency pair US Dollar (USD) and Japanese Yen (JPY). The pair thus defined tells us how many Japanese Yen units (quoted currency) are needed to buy one dollar (base currency). The value of the USD / JPY pair tells us that 1 US dollar is equivalent to N Japanese Yen. if the pair is trading at 1.50, it means that 1.5 Yen (¥) is required to buy a US Dollar ($).
What Does USD/JPY Depend On?
The USD/JPY is influenced by factors that weigh as much on the yen as on the dollar: in relation to each other and to other currencies. For example, the interest rate differentiation between the Federal Reserve (Fed) and the Bank of Japan (BoJ) can influence the exchange rate. When, for example, the US central bank intervenes to make its currency stronger, the value of the USD/JPY can increase, given that the value of the dollar is higher than in the Yen, and vice versa. USD/JPY tends to have a positive correlation with USD/CHF because, aside from the fact that they both use the U.S. dollar as the base currency, the Swiss franc is the other currency that has a safe haven status with investors.
History
From the late 1970s to the mid-1980s, the yen lost its value enormously compared to its American competitor. Until 1985 and the agreements of the Plaza that ordered the American government to stop lowering the value of the dollar compared to other currencies, we watch a recovery of the yen on the exchange markets. We are thus witnessing a sharp fall in the pair, whose value will eventually reach the threshold of 80 ten years later, in 1995. It was then the yen’s turn to depreciate again due to the financial crisis that hit the country until 2002 and linked to the merger of Japanese assets abroad. Today we are witnessing a new appreciation of the yen, although the Japanese government is determined to curb the costs of the progression of its national currency to preserve the country’s competitiveness.
Which Are the Organizations That Set The USD/JPY Rates?
As with all other currencies, the interest rates of the US dollar and the yen are set by the large central banks of these two countries. As for the greenback, in fact, it is the US Federal Reserve (FED) that is in charge of determining the rate. For the Yen, it is the Bank of Japan that updates the interest rate for this currency. These interest rates can be regularly reviewed by these bodies and it is therefore important to regularly consult an economic calendar to learn about the new rates.
Why Do Rates Affect The USD/JPY Exchange Rate?
The interest rate level of each currency of a specific pair is of some interest because it is included in the gains or losses recorded when you buy or sell this pair. Practically, when a currency has an upward interest rate, the capital gain at the time of sale will increase, just as a currency with a downward rate will be more attractive to buy. But it is obviously important for your strategies to know at the same time the evolution of dollar and yen rates.
Characteristics and Specificities of The US Dollar or USD
To better deal with the USD/JPY currency pair, one must obviously know the specificities of the two currencies that make it up. Let’s start with the US dollar, USD, the evolution which is usually the result of a refuge value status as well as the level of US growth or the Fed’s decisions and policy. The US dollar is considered a safe haven value because over time this currency has managed to pull itself out of various economic and financial crises. Obviously, the fact that the United States is still often regarded as the first world economic power is not to be overlooked. However, although it is still taken into account, the role of a safe haven dollar has weakened for some years. As a result, when the market goes through a period of high risk rejection, the US dollar’s price tends to rise, as happened during the 2007/2008 crisis.
Obviously, the level and the economic health of the United States also have their importance in analyzes of this value, given that they have a strong influence on the quotation of this currency. It must be considered that the US economy is particularly reactive to economic cycles and there is therefore a very strong growth in periods of recovery and expansion while suffering greatly during periods of recession. Finally, the Federal Reserve or Fed and its various interventions and decisions also have an undeniable weight on the quotation of this value and you must therefore take into account the different measures taken by this body, especially those aimed at reviving the US economy with a drop or a rise in discount rates or with Quantitative Easing (QE) programs that operate by creating strong inflation, which is certainly not without consequences for the US dollar.
Characteristics and Specificifications of the Japanese Yen
Let’s now pass to the second currency of this pair, or the yen, and to the elements that most influence its value. The first thing to know about the yen is that this currency has a safe haven status in the sense that it loses value when the world market is growing and gains points in the event of a crisis. The fact that the yen is used for Carry Trade strategies is another element that makes it a safe haven on the markets. Since the beginning of the 21st century, the BoJ, the Central Bank of Japan, has been implementing a 0% discount rate policy to avoid the risk of deflation and too weak growth. This decision obviously has a direct influence on the value of the yen as this currency can be used to finance the purchase of other currencies with a higher rate of return.
In fact, remember that when you sell a currency on Forex you pay the interest rate and when you buy a currency, instead, you get that rate. For this reason, the USD/JPY has long been influenced by the Carry Trade strategy used by many investors but, since 2009, this strategy is less and less practiced due to the general decline in interest rates of other central banks. Since the value of the yen is little exposed to the economic health of Japan, at the time of your taking of positions on the USD/JPY you must first take into consideration the status of safe haven of this currency. In fact, note that in the past Japan has traversed numerous economic crises from which it emerged without problems and that the yen remains a currency widely used in international trade. But it is above all Japan’s debt that makes the yen a refuge value par excellence.In fact, despite the fact that it has the highest debt in the world with a debt level of over 225% of GDP, Japan holds a large part of its debt or over 90%. The country therefore does not suffer from the uncertainties of the financial market for its own refinancing, while the debt of the other countries of the world is literally exploding, particularly in the developed countries. This is easily seen in the historical stock charts on the occasion of the subprime crisis and the financial crisis that led to massive purchases of yen, a scenario that then reproduced in 2011 with the debt crisis. However, as we saw earlier, when the world economy is doing well, the yen tends to lose value. It is therefore fairly easy to predict future USD/JPY price changes based on the level of global growth and any economic crises. Finally, unlike most other currencies, the yen is not really influenced by the Japanese economy.
The trade balance of this country, which is at the same time a great exporter and a major importer, shows in fact a saw-tooth evolution that is sometimes positive and sometimes negative depending on the level of imports and exports. However, there is a correlation between the value of the yen and the Japanese economy, given that it is precisely this currency’s competitiveness compared to other world currencies that makes imports or exports more or less advantageous and, therefore, makes the country more or less competitive. As you can see, the Japanese economy is not a factor of influence to be favored if you want to invest in this currency pair. It should also be noted that the growth of the Japanese economy has remained relatively weak for some decades due to persistent deflation. The efforts made by the Bank of Japan to reverse this trend, in particular through quantitative easing, will be monitored, even if these have not given any lasting concrete results for the time being.
Tips for Trading The USD/JPY
The indicators that allow to better anticipate the movements of this pair are numerous and very precise. Since the two currencies benefit from precise monetary policies, it is essential to keep informed of all the news from the US Federal Reserve for the dollar and the Central Bank of Japan for the yen. In fact, it is not uncommon for these two organizations to communicate their future interventions on the foreign exchange market in advance as well as their future prospects. On the other hand, the most interesting figures concerning Japan are those of industrial production and export. Foreign markets are, in effect, the country’s main source of profits, which tends to maintain strong competitiveness. Attention, therefore, to a fall in this indicator that could lead to an action tending to devalue the yen, such as a massive sale of currency by the Central Bank. On the contrary, good results in this sector very often contribute to revalue the course of the Japanese currency.
On the dollar front, the most significant figures are those related to employment and real estate that have a very strong influence on the value of the greenback. The more these sectors are doing well, the more the dollar appreciates. Nevertheless, since the monetary policy conducted by the country is controversial, it is essential to carefully follow the important publications to anticipate the speculation of psychological effects.
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