A recent NHK World-Japan report discussed how the Japanese yen briefly fell to ¥120 to the dollar, the lowest level it’s been over six years. Traders are selling yen in anticipation that US interest rates could rise more quickly than previously expected, after the US Central Bank suggested they might raise rates by twice as much. The yen, in turn, lost its ground after the Bank of Japan announced its plans to maintain its massive monetary easing program for the time being.
The Japanese yen (JPY) is the third-most traded currency in the foreign exchange (forex) market after the US dollar and the euro, as well as being an important reserve currency. The yen is strong due to Japan’s strong economy, as the country exports more goods than it imports. When inflow is larger than outflow, a country has a huge investment resource — which is why Japan is a large creditor nation.
With the pandemic, however, the Japanese government’s stimulus package has weakened the JPY exchange rate. And although a weaker yen has long been seen to boost the Japanese export economy, its status as an anaemic currency has recently become unfavourable with the surge of importation. In this article, we’ll explore the power of JPY over the Japanese market.
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Weaker yen influences Japanese spending power
We explained in our article called ‘Japan’s New Consumer Groups Explained’ how the Japanese consumer goods market is one of the most lucrative in the world. Compared to buyers in other markets, consumers in Japan are above-average in terms of wealth and like to spend money on high-quality products. As foreign competitors adjust to this level of demand, most consumers are now buying imported smartphones, home appliances, and apparel.
Now, more Japanese consumers are sensitive to higher prices brought on by the yen’s weakness. At the same time, cheaper currency no longer increases exports the way it used to, as many Japanese companies have shifted production overseas. Currency fluctuations, along with a reliance on importation, low wage growth, and higher prices for daily necessities, can lead to a decline in Japanese purchasing power.
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Local manufacturers are wary of the yen’s movements
In a survey conducted with major manufacturers listed on the Tokyo Stock Exchange, 29.3% of respondents described the weakened yen as disadvantageous, particularly within industries oriented towards domestic demand which depend on imported goods and materials. Aside from rising prices of imported goods, the weaker yen also risks an increase in indirect costs like materials and fuel for production.
Yen movements are perceived differently, depending on the industry. An article published in the Open Economics Review reflects the more traditional stance over JPY. A strong yen causes distress among policymakers and manufacturers, and its movements on the exchange rate have a significant impact on up to seven industrial sectors. Sectors who benefit from a weaker yen want its position to be between ¥110 ($0.90) and ¥115 ($0.94), while those disadvantaged by weak yen look at a rate between ¥105 and ¥110.
Timing is key when trading yen in foreign exchange
Japan has a powerful force of retail forex traders, with almost one million margin accounts. Until recently, most traders were only active at night to match the European and US trading hours. Since the remote work shift, investors now keep an eye on the yen’s performance throughout the day. This is evident on FXCM’s MetaTrader 4 software trading platform, where users engage with the world’s most prominent financial markets on-demand. Using a platform like MetaTrader 4, investors can follow interactive charts and built-in indicators for technical analysis, leading to a clearer understanding of Japanese market movements.
The Bloomberg Quint observed that this increase in intraday trading has spurred dramatic price movements, such as the “flash crash” that hammered the dollar and sent the yen up. Retail traders take a contrarian view by getting into the market when the prices dip, which can have a moderating effect on how JPY moves. A high-speed, high frequency approach called “scalping” is also becoming popular among younger investors, who repeatedly buy and sell currencies in the space of seconds or minutes. When these bets go wrong, however, the results can be explosive. It’s key for investors to check volatility statistics before making any decisions to buy or sell yen.
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