Japan: Facts, Figures, and Features
Economic Overview
Aside from being the video game capital of the world, Japan's economy is ranked as the third largest as of 2009.
Since the end of World War 2, Japan has been on a rampage, experiencing rapid economic growth, despite the fact that the country is mountainous and volcanic. Because of the laws of nature, this limits the growth of natural resources in Japan.
In order to make up for this lack of resources, the Japanese economy has become very export dependent, with exports amounting to almost $500 billion in 2009! This amount is equal to about 40% of their total output!
Recently, Japan has been riding the cocktails of China's massive growth. With Japan being the nearest major economy, Chinese demand has led to massive shopping sprees of Japanese products.
Not only does Japan have great food (how can you beat tempura and sushi?!), it is also home to one of the world's biggest financial centers - Tokyo!
As you see in the movies, Japanese businessmen mean serious business! With so much money flowing in and out of Tokyo every day, traders and investors can use Japan as a proxy for what's happening in the Far East.
Monetary & Fiscal Policy
While the Bank of Japan (BOJ) has been around since the late 1800s, only recently did the BOJ gain independence from the Ministry of Finance (MoF). It was only in 1998 that the Japanese government passed laws giving the BOJ control over monetary policy.
Take note that the Ministry of Finance still remains in charge of foreign exchange policy, which has led to tension and continuous differences between the two.
Normally, the government and the central bank are independent of each other - one should not have any influence over other. This is not the case for Japan. Even though the BOJ has gained independence from the government, there is a question of who really "wears the pants".
The MoF has kept a watchful eye on the BOJ, pressuring it to pass policies that would help the yen hit the MoF's foreign exchange targets. Similar to other central banks, the BOJ's main objective is that of price stability. The ninja bankers at the BOJ make use of open market operations and interest rates changes to meet their goals.
One thing you should know about the BOJ is that for a very, very long time, they have kept rates at low levels, with the current rate sitting at a measly 0.10%. Because the rate is already so low, the central bank cannot decrease the rate to stimulate growth or create liquidity.
For instance, in its efforts to fight deflation, the BOJ has whipped out its shurikens and has flooded the markets with money through unorthodox quantitative easing measures.
Quantitative easing measures are moves made by central banks in order to increase liquidity and money supply through the purchase of government securities.
This is sometimes called "printing money", because the central bank literally creates new money from thin air in order to buy back their government securities. In theory, the increase in the money supply would lead to an increase in lending and spending.
Over the years, Japan has created liquidity in the markets by flooding the economy with various programs that let the BOJ buy or sell Japanese government bonds and bills.
Getting to Know the JPY
The yen is so hardcore that it didn't want to be named anything else. It came into the foreign exchange market called the yen and up to now, it is still called the yen. The yen is the yen is the yen. It is also tied in currency crosses, especially against the EUR, GBP, and AUD.
Traders love me like the Japanese love their sushi.
After the USD and the EUR, the JPY is the most heavily traded currency, with USD/JPY also ranking as the 2nd most traded currency pair. Because of the role that Japan plays in international trade, there is need for the JPY in order to complete international transactions.
Are you ready for the Asian Sensation?
When investors think of Asia, they subconsciously think of Japan. With Tokyo being one of the world's major financial centers, Japan is often representative of what's happening in Asia.
Japan is normally a major trading partner of other Asian powers. If business is doing well in Asia, this is normally reflected by the Nikkei, the major stock exchange in Tokyo.
I'm always on the go...
With Japanese reports coming out during the Asian session, it is only natural that the yen trading is active during the Asian session (0:00 GMT).
The yen can also be active in other sessions depending on what economic data is released. This should be expected - it is part of Japanese culture, they do business around the clock!
...but I'm all for cheap thrills!
With many investors looking for the most bang for their buck, some have resorted to carry trade. With the JPY having the lowest interest rate amongst the majors, it is normally used in carry trade as a funding source.
The Japanese tend to think alike.
Japanese asset managers tend to make the same investment decisions. This leads to highly correlated positions, which means that it is likely to see trends develop.
I'm prone to breakouts...
One characteristic of yen pairs is their tendency to consolidate for quite some time, then break out in direction, then consolidate once again, then break out once again! Keep your eyes and ears ready because you never know when this might happen!
...and I have a love-hate relationship with China
With China emerging as a major power in the world, its influence on the JPY will continue to grow. If signs point to further growth in the Chinese economy, it may affect demand for the JPY.
How so?
As we've said, China is one of Japan's major trading partners. Naturally, as Chinese businesses boom, they will need to order more from Japan. This in turn would increase demand for the JPY, causing it to appreciate.
Important Economic Indicators for the JPY
Gross Domestic Product - This measures the economic activity of Japan. It indicates whether the economy is red hot like lava from Mt. Fuji, or if it's in the process of harakiri.
Tankan Surveys - These reports survey managers from a broad range of industries, questioning them on their views of the economy. Rising sentiment (scores above 0.0) indicate that Japanese businessmen expect business activity to pick up. Scores below 0.0 suggest otherwise.
Trade Balance - The Japanese economy is heavily export dependent. Falling export numbers could lead to a decline in economic activity.
Unemployment Rate - This measures the rate of unemployment in Japan. High unemployment could lead to a decline in consumer spending - how would they be able to afford their video games and anime??
Consumer Price Index (CPI) - In the past, the Bank of Japan has shown that they are not afraid to make moves to fight off deflation. If trends show that prices of samurai swords and shurikens continue to fall, it may lead to some surprise moves by the BOJ.
Core Machinery Orders - A large chunk of Japan's exports are comprised of machinery orders. The rise or fall in core machinery orders could reflect the current status of Japanese trade.
What Moves the JPY
Investment Moves
Due to its low interest rates, the JPY has been considered as a good funding source for investments in other countries. This means that if traders and investors are scared, they will begin to unwind their positions in higher yielding assets. Once traders start unwinding these riskier positions (carry trades), they have to cover their short JPY trades by buying back the currency.
The BOJ effect
This doesn't refer to those announced, scheduled effects. I'm talking about currency intervention! The BOJ and MoF keep special attention to the FX markets. With the Japanese economy being very export dependent, the value of the yen plays a key role in trade.
The BOJ doesn't want the JPY to appreciate too much because it would make Japanese exports relatively more expensive. By keeping the value of the JPY lower, they can stimulate demand for Japanese products, which in turn, would benefit the economy.
Trading USD/JPY
USD/JPY is traded in amounts denominated in JPY. Standard lot sizes are 100,000 USD and mini lot sizes are 10,000 USD.
The pip value, which is denominated in Japanese yen, is calculated by dividing 1 pip of USD/JPY (take note, for yen pairs, that's 0.01) by USD/JPY's current spot rate.
Profit and loss are denominated in Japanese yen. For one standard lot position size, each pip movement is worth 1,000 JPY. For one mini lot position size, each pip movement is worth 1,000 JPY. For example, if the current exchange rate of USD/JPY is 95.00 and you want to trade one standard lot, then one pip would equate to 10.52 USD
Margin calculations are based in U.S. dollars. For instance, with a leverage of 100:1, 1,000 USD is the needed to trade 100,000 USD/JPY.
USD/JPY Trading Tactics
USD/JPY tend to follow the short to medium term trends, which could last a few days. If you are maintaining a swing trade, that is holding a trade for more than a day, you can try to enter on retracements.
Once price begins to consolidate, you can close your position, and wait for another trend to develop. Take note that when price breaks out, it is likely that you will see a sustained move as traders jump back in on the trend.
Another tip to remember is that Japanese industrial companies normally set their orders at round figures, like 100.00 or 90.50. You should keep tract of whenever price are near these figures, as they can serve as short-term support and resistance levels.
Finally, you should also keep an eye out other yen pairs like EUR/JPY and GBP/JPY. If you see that one of these crosses is about to break a key technical level, it could unleash a fury of JPY buying or selling that will have a massive effect across the board.
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