Aspects traders need to know about the Japanese yen to trade better – Octa

Impressively, it ranks as the third most traded currency, following only the U.S. dollar and euro. This popularity is thanks to favourable trading conditions, such as high liquidity and faster execution times. Moreover, market analyses and trading forecasts extensively cover the JPY, so traders have plenty of information to make informed decisions and seize trading opportunities.

JPY is a compelling asset to keep in mind, no doubt. And if you are planning a JPY trade at Octa, here’s what you should know.

Safe-haven status and risk sentiment

The yen is often considered a safe-haven currency, meaning it tends to increase in value during periods of global economic uncertainty or market turmoil. This status is due to Japan’s stable political environment, low inflation history, and current account surplus.

For instance, during the 2020 pandemic, financial markets experienced extreme volatility, and investors sought safety in the JPY, among other assets. This demand caused the JPY’s value to rise against other major currencies.

What’s important to note, though, is that the same safe-haven status can also lead to an overvaluation that negatively impacts Japan’s export-driven economy. The Japanese government and central bank may intervene to stabilise the JPY’s value. Therefore, it is better to diversify and not rely on the yen too much.

Economic indicators and events
Gross Domestic Product (GDP) growth, employment rates, and inflation levels are key to assessing a country’s economic health.

This is how a trader would roughly analyse these factors: Japan’s GDP has been gradually growing when measured in yen but suffered if assessed in U.S. dollars due to the yen’s depreciation. Despite a shrinking population, per capita incomes are still rising even with a stagnant GDP. If inflation stays positive and interest rates keep going up, the yen is likely to get stronger.

The unique aspect of Japan’s economic data is the Takan Survey. It focuses on Japanese companies with a minimum capital requirement or those considered highly influential. They are asked about trends and economic conditions affecting their industry in the next quarter and year. Being released before Japan’s GDP data, the Takan Survey is seen as an early indicator.

Currency interventions and government policies

The Japanese government has specific policies regarding currency interventions and interest rates. For instance, the Ministry of Finance intervened in currency markets in the past by selling dollars from their foreign reserves to support the yen’s value. This intervention process, initiated by the finance minister and executed by the Bank of Japan (BOJ), tends to increase volatility in the yen’s value.

Japanese officials are very subtle. They closely monitor and occasionally hint at extraordinary actions to prevent excessive movements in the Forex market. They use statements like ‘We will not tolerate speculative movements’ or ‘We’re ready to take decisive action’ to guide market expectations.

Recently, the BOJ made an important policy shift by ending eight years of negative interest rates and raising the short-term policy rate from –0.1% to between zero and 0.1%. BOJ’s governor, Kazuo Ueda, said they will be careful, keeping an eye on the economy, and continue with policies that support growth without causing problems. If they raise interest rates in the future, it will be done slowly to avoid sudden changes.

Risk management and trade execution
Here are some other key aspects to consider when trading the yen:

• JPY pairs have two digits less in their quotes compared to standard quotes.
• Common JPY pairs include USDJPY, EURJPY, GBPJPY, and AUDJPY, known for their high volatility.
• GBPJPY can move up to 200 points in a trading session.
• The yen sees its major movements during the Asian trading session and is less affected by European news.
• The European session is preferable for trading JPY pairs. The BOJ doesn’t intervene during this time, which reduces sudden price changes.
• In addition to economic and political events, key factors to monitor are export and import volumes and energy prices.
• The Japanese yen often correlates with global equity markets, especially the Nikkei 225 stock index. During times of market turbulence, the yen can strengthen as investors bring funds back into Japan.

Market dynamics of JPY pairs
USDJPY, known as The Gopher, is the second most traded currency pair globally. The best time to trade USDJPY is during the overlap of the London and New York sessions (12 p.m. and 4 p.m. UTC) for tighter spreads and increased volatility.

GBPJPY is also volatile and offers trading opportunities for short-term speculators. The most volatile times for GBPJPY are during the Asian and European sessions, particularly between 6:30 a.m. and 2:30 p.m. UTC. However, during the Euro-Asian overlap, trading activity may not always increase as expected, and it can be one of the slower parts of the trading day.

In 2024, the Japanese yen continues to be a vital currency in Forex trading and the global economy. While it can be tricky, traders must understand its dynamics to seize opportunities effectively. Also, they should be mindful of risks, such as how the Bank of Japan’s policies can influence the yen’s value and increase its volatility at specific times during the trading day, among other factors.

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