In a previous article, we discussed the EUR/USD which is the most traded currency pair on the financial markets. In this article, we will focus on the second most traded currency pair in the world the USD/JPY pair, which also belongs to the group of the most important currency pairs, the “majors.” Other major currency pairs are the EUR/USD, GBP/USD, AUD/USD, USD/CHF, NZD/USD and USD/CAD.
Japanese yen and “carry trades”
The Japanese yen has a low-interest rate and is usually used in carry trades. Carry trades involve borrowing in a low-interest rate currency and converting the borrowed amount into another currency. This is why the yen is one of the most traded currencies globally.
USD/JPY: Base and Quote currencies
In the USD/JPY pair, the first listed currency is the US dollar, which is called the base currency, while the Japanese yen is the second currency, also known as the quote or counter currency. The pair represents the United States of America and Japanese economies.
Trading the “ninja” or the “gopher”
Trading the USD/JPY pair is also known as trading the “ninja” or the “gopher”, although the latter name tends to be used more to describe the GBP/JPY currency pair.
Positive correlation with USD/CHF and USD/CAD
The USD/JPY has a positive correlation with the USD/CHF and USD/CAD due to the fact that all these currency pairs use the US dollar as the base currency. The USD/JPY is usually impacted when the interest rate differential between the Bank of Japan (BoJ) and the Federal Reserve Bank (Fed) widens significantly.
What influences the currency pair?
The USD/JPY can be impacted by market news or the monetary policy decisions of the two main central banks: The Federal Reserve Bank and the Bank of Japan.
- The Federal Reserve
The Fed is the central bank of the US whose main responsibilities are to keep unemployment rate low levels and inflation around 2%. The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Fed which organises 8 meetings in a year and reviews economic and financial conditions.
The Bank of Japan
The Bank of Japan is the central bank of Japan and its main responsibilities are to issue and manage banknotes, implement monetary policy and to ensure financial stability. The Policy Board focuses on providing currency and monetary control and setting the next steps the central bank will take. The next interest rate decision of the Fed and BoJ will take place on the 20th and 22nd of September, respectively.
Jerome Powell is the 16th chair of the Fed. He took over as the chairman of the Board of Governors of the Federal Reserve System in 2018 after replacing Janet Yellen. His four-year term ended in February 2022 and in May 2022 he was sworn in for his second term. His term as a member of the Board of Governors will expire on the 31st of January 2028.
Kazuo Ueda is the 32nd and current Governor of the BoJ. He is the dean of the business department at Kyoritsu Women’s University in Tokyo. He is also the external director at JGC Holdings Corp. Despite being considered an expert on monetary policy, he was seen as a surprise appointment by analysts.
USD/JPY influential events of 2023
Central banks’ differences have had a great impact on the currency market. The US Federal Reserve adopted a more aggressive tightening in March 2022 while the Bank of Japan maintained its ultra-loose monetary policy.
Japan is the only country in the world with negative interest rates. Following the Fed’s and the ECB’s rate rises, the BoJ has been pressured to change its ultra-loose policy stance. The central bank surprised economists in December when it changed its yield curve control policy, widening the band from a quarter to half a percentage point. In July the BoJ eased controls on its government bond market, changing a keystone of its ultra-loose monetary policy and prompting benchmark bond yields to the highest level in nine years. But, the BoJ held its overnight rate at minus 0.1%, stating that more time was needed to achieve its 2% inflation target.
The recent BoJ moves suggest that the bank is moving towards an exit from its easy policy, with sources saying that it will take time, perhaps the entire five-year term for Ueda. An exit from the ultra-loose policy will strengthen the yen. The government has frequently prompted the BoJ to make its ultra-easy policy more flexible, especially after the yen hit a 23-year-low in September 2022.
Nonetheless, the Bank of Japan’s lack of transparency on monetary policy may keep the yen weak for the foreseeable future, as many analysts have noted.