Trading the Japanese Yen

by FX EA Review
Trading the Japanese Yen

The importance of the Yen, Japan’s national currency started to increase after Japan started expanding trade and investment with East Asian countries to respond to the sharp appreciation of the Yen against the U.S. Dollar. This happened shortly after the 1985 Plaza Accord. The Japanese Yen experienced appreciation during the Eurozone sovereign debt crisis and established it as one of the safe-haven currencies of the world. 

Is the Japanese Yen a Safe Haven?

The Japanese Yen is considered a safe haven because of the following reasons. The first is the zero negative interest rates they have. People immediately sell their assets and borrow less during an economic crisis. The Yen thus increases in price because of the closing of borrowing positions. The whole process of using a cheap currency after borrowing it to purchase assets with higher yields is known as carry trading. 

The second reason is Japan’s positive net foreign asset position. When facing slow or crisis-ridden markets, Japan sells foreign assets to be defensive which repatriates Japanese capital from abroad. When they convert the capital back to yen, its value increases.

The anti-carry properties of the Japanese Yen make it a risk-off hedge and a source of diversification. However, since narratives and general thinking cannot be trusted blindly, traders and investors should rely more on their knowledge of investments and current market conditions. 

How to Trade and Invest in Japanese Yen

Investing with Stocks and Bonds

The appreciation of the yen against the U.S. Dollar has a boosting effect on Japanese Share prices. Investors of stock also benefit from the dividends paid by the companies. By buying shares of Japan-based companies such as Nissan, Cano, Toyota, and others, you can indirectly gain from an appreciation of the Yen’s value. These stocks are available to trade on major exchanges including the New York Stock Exchange.

Another alternative would be the Japanese Government Bonds. However, interest rates offered are pretty low. The price of these instruments serves as a proper indicator of general Japanese economic conditions such as interest rates, GDP growth, inflation, and trade deficits. 

Investing with Exchange Traded Funds

The Japanese Yen can be accessed easily by international investors through Exchange-traded funds. These funds aim to mimic the Yen’s price vs either a basket of international currencies or the U.S. dollar. They employ a variety of derivatives including currency swaps. There are other ETFs that provide short-selling or leveraged options enabling holders to gain from the yen’s movement in different ways. Examples of some of the most popular ETFs in this context are CurrencyShares Japanese Yen Trust (FXY) and ProShares UltraShort Yen (YCS). 

Investing in Futures

In the futures market, you speculate on the rise or fall of the Yen’s value over a limited period of time. These futures come in contracts which have a fixed strike price and expiration date. You can also buy and sell futures options contracts. You can find Yen futures on the Chicago Mercantile Exchange. Use a managed future account that will allow you to place your money with an experienced dealer who will have the obligation to limit your risk. 

Using it as Currency Hedge

Because of Japan’s status as an investment destination, the Japanese yen is also used as a currency hedge. U.S. based international investors purchase long or short Japanese Yen funds or directly in the spot foreign exchange market. This offsets the currency effects, losses, and gains. 

Investing in Forex Markets

As an investor, you can take positions in Yen relative to other currencies such as the Euro or U.S. Dollar. Contracts in the forex market are usually highly leveraged. This means that capital requirements are quite less. Short positions anticipate that the Yen will fall in value while long positions do the opposite. Before trading these markets, you should be warned of the effects of leverage, as it means entailing greater risk. 

Examples of Trading Pairs and Cross Pairs consisting of JPY

USD/JPY

The USD/JPY currency pair refers to the pairing of the U.S. Dollar and the Yen. It is one of the major currency pair types and is arguably the second most traded pair in the world. Japan, which is one of the top five when it comes to GDP, prefers a weaker yen to increase international sales, as its economy is primarily driven by exports. Its correlated pairs are NZD/JPY, CAD/JPY, and EUR/JPY.

CAD/JPY

The CAD/JPY pair is the pairing of the Canadian Dollar with the Japanese Yen. Oil prices have a considerable influence on this pair because of Canada’s status as the 6th largest oil-producing country and Japan as the third-largest net importer of oil. Its related currency pairs are the GBP/JPY, EUR/JPY, and NZD/JPY.

NZD/JPY 

The NZD/JPY is another pair that is popular for carrying trading. This is mainly due to the difference in interest rates between Japan and New Zealand. Its correlated pairs are CAD/JPY, CHF/JPY, and AUD/JPY. 

AUD/JPY

The AUD/JPY is a cross pair and is a popular currency pair used in carry trading. This is due to the high-interest rate of the AUD compared to that of JPY. A trader simply opens a buy position to perform a carry trade with this currency pair. Its correlated pairs are NZD/JPY, CAD/JPY, CHF/JPY.

CHF/JPY

This is the pairing of the Swiss franc with the Yen. The Swiss franc is a safe haven currency that increases in value during periods of geopolitical and social crisis. The yen on the other hand is manipulated by Japan’s export-reliant government. The dependency of Japan on exports drives the government to weaken the Yen.  Its correlated pairs are the EUR/JPY, GBP/JPY, and NZD/JPY.

EUR/JPY

The EUR//JPY is extremely volatile in nature, capable of moving as much as 250 pips in one day. Its nickname is the Yuppy or Euppy. This pair is traded the most during the U.S. and Euro sessions. Its correlated pairs are CAD/JPY, GBP/JPY, and CHF/JPY. 

GBP/JPY

The GBP/JPY, also known as the geppy or gopher, is another extremely volatile currency pair that is capable of moving up to 350 pips on a trading day. Its related pairs are CAD/JPY, CHF/JPY, EUR/JPY. 

Conclusion

The Yen reacts to Japanese inflation rates and interest rates, as well as the state of other economies in the Asia/Pacific sphere. The currency is backed up by one of the financially strongest economies of the world.  It can thus be a good option to invest in your stocks as real estate investments aren’t performing well.

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