USD/JPY News and Analysis

Japan Currency JPY

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Japan Currency US Dollar USD/JPY

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Live USD/JPY Chart


USD/JPY is the second most actively traded currency pair following the EUR/USD, as the Japanese Yen is the third most traded currency in the world. The currency pair attracts the largest range of traders and is utilized in a wide range of investment strategies.

Nicknames

The USD/JPY pair is most commonly referred to as Dollar-Yen. Alternatively, simply Yen or the Yen can also be used to describe the pair. While other nicknames include Gopher and Ninja, they are seldom used.

USD/JPY Correlations

There are several correlations seen in the USD/JPY currency pair. While some correlations are consistent, other correlations tend to diverge at times. The pair has a strong correlation with the Japanese equity markets, especially export-oriented companies. As the Japanese Yen gains in value, Japanese exporters profitability stand to be affected. The Nikkei index as a whole tends to carry a strong correlation with the Yen for similar reasons. Divergences are seen from time to time between the index and the exchange rate, especially if there are stronger fluctuations in the US Dollar.

US equity indices also correlate with the USD/JPY, but for different reasons. The US equity markets are often viewed as a global gauge for risk sentiment. When investors feel confident, the stock market goes up and carries the USD/JPY higher, and vice versa. The reason behind it is because the Japanese Yen is viewed as a safe haven currency. During periods of risk aversion, the stock markets tend to decline, as cash is extracted from the markets, Japanese Yen are commonly sought on their safe haven status and the increased demand causes the USD/JPY to decline.

At times an inverse correlation can be seen with Gold and other safe haven assets. This tends to happen during periods of risk aversion. It is important to note that the markets do not simply oscillate between periods of risk aversion and risk appetite, there are periods where sentiment is neutral, and during those times correlations tend to get skewed.

What Factors Affect the USD/JPY?

There are several factors that affect the USD/JPY. Correlations between the US and Asian equity markets are a large factor in the exchange rate. Risk sentiment in the markets will tend to see money flow to safe haven assets during risk aversion, and the Japanese Yen tends to be in high demand. While there are other safe haven assets such as Gold, the Swiss Franc and in some cases the US Dollar, the Yen historically has appreciated the most during ‘risk off’ periods. Risk sentiment is not isolated to the equity markets; political problems, natural disasters or essentially any event that causes a loss of confidence for the investor would be deemed as a risk aversion period.

The Yen is also commonly used as a funding currency as the Bank of Japan has held near zero rates for an extended period of time. Investors will borrow Japanese Yen and purchase other assets that offer a greater yield. In the currency markets, this is referred to as the carry trade. During periods of increased investor optimism, these trades tend to gain popularity, putting pressure on the Japanese Yen as it is heavily borrowed.

In more recent times, the central bank has had a big influence on the Japanese Yen. In 2013, the Bank of Japan implemented easing measures that caused a two-year rally that was stronger than any other rally or decline seen among the majors. It is viewed that the bank will continue its efforts to fight deflation and encourage growth, making it probable that the central bank will continue to drive the currency pair. Further information about the Bank of Japan, including press releases and monetary policy statements, can be found at https://www.boj.or.jp/en/.

Similar to the Bank of Japan, the Federal Reserve in the United States can also be a big driver in the USD/JPY. In the event the Federal Reserve raises their interest rate, The US Dollar stands to appreciate. As the Japanese Yen is associated with a negative interest rate, the yield on the USD/JPY pair offers more appeal to trade interest rate differentials. Monetary policy statements and further information regarding the US economy can be found at https://www.federalreserve.gov/.

When Does the USD/JPY Experience Volatility?

While the USD/JPY experiences the highest volatility during the European and North American session overlap as most majors do, the pair tends to trade with elevated volatility during all trading sessions. Equity markets drive volatility to the pair during each session, while during the Asian session Japanese data is also released. The North American session will have economic releases from the US as well as the US equity markets driving the pair.

There are some points during the day where volatility tends to drop. After the US markets close, there is a gap ahead of the Equity open in Tokyo. While the New Zealand and Australian markets are open during this time, there tends to be less volatility during the gap. There is also a period ahead of the North American open, when the Asian markets have already closed and only European markets are trading, at times, volatility will tend to decrease during this gap.

Who Trades the USD/JPY?

USD/JPY has the largest variety of traders among the majors. Scalpers see the appeal in the pair because of the attractive spread, intraday and day traders are drawn to the volatility, and speculators will trade the pair for several reasons.

Speculators and position traders are active in the pair for interest rate differentials resulting in carry trades, shifts in risk sentiment, hedging, arbitrage, and monetary policy speculation. At one point Yen dominated mortgages gained popularity, creating interest in the currency pair outside of traditional trading methods.

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