Currency Fundamentals

Currency – Japanese Yen (JPY)

Japan boasts the world's third largest economy, but faces a unique challenge: limited natural resources. To overcome this, Japan strategically positioned itself as a global export giant. Following World War II, Japan's industrial sector surged, fuelled by:

• Export Boom: A rapid increase in exports powered economic growth.

• Low-Interest Rate Advantage: The Bank of Japan's strategy of persistently low interest rates, starting from a high of 6% in 1990 and dipping as low as zero by 1999 (currently between 0% and 0.10%), made it cheaper for businesses to borrow money and invest in exports.

This low-interest-rate environment has been a double-edged sword. While it supported the export boom, it has also contributed to deflationary pressures in recent years.

Carry Trade

Low interest rates make the yen more appealing to investors. As a result, the Japanese yen is a strong choice for carry trades, particularly against the Australian dollar. We've already seen how carrying trades work. The low interest rates in Japan and higher rates in Australia provide a favorable interest rate differential.

Importance of the Bank of Japan

Japan's export-driven economy presents a unique challenge for its currency, the Yen (JPY). Let's explore this balancing act:

• Exports and a Weak Yen: Japan relies heavily on exports like automobiles, electronics, and steel. A strong Yen makes these exports more expensive for foreign buyers, potentially hindering economic growth. This is why the Bank of Japan (BOJ) may intervene in the currency market to weaken the Yen if it appreciates too much.

• The Safe-Haven Yen: The Yen is a paradox. In times of economic turmoil, it's seen as a safe haven, attracting investors seeking stability. This increased demand can strengthen the Yen, which can be counterproductive for exports. The BOJ closely monitors the Yen to manage this potential conflict.

For forex traders, understanding these dynamics is crucial. Following the BOJ's policy decisions and economic data releases related to exports can provide valuable insights into potential Yen movements.