The Japanese yen (JPY) is used as a major gauge for the overall strength of the Asian economic conditions, since the Japanese economy is the largest one on the continent.
If any problems in the Japanese arena occur, they are directly reflected on the economic conditions of other Asian countries. Alternatively, any economic or political problems in other Asian countries are reflected on Japan’s conditions, which results in a movement in the value of the JPY.
The Bank of Japan (BoJ) and Ministry of Finance of Japan follow an interventionist policy on the forex market. This happens especially in the case when these institutions are not satisfied with the JPY levels.
The Japanese economy is characterized as being highly politically connected with government officials and private institutions. So, if the JPY appreciates they tend to take actions in order to decrease its value.
Since the BoJ is an active player on the forex market, it receives regular information on the positions of large hedge funds. The BoJ tends to use this information on its behalf and the interests of the Japanese economy.
The interventionist activities of the BoJ and MoF are influenced by the following factors:
- Appreciation or depreciation of the JPY – if it significantly increases in value, these institutions tend to intervene.
- The current rate of the USD/JPY
- Positions of a speculative character – the MoF and the BoJ tend to intervene when forex market participants hold opposite direction positions.
An active movement in the value of the JPY is observed at the end of the fiscal year, which is March 31st. The reason for this is that exporters at this time of the year tend to return their dollar denominated assets back to their countries. This is used by speculators because they foresee the need for JPY that results from the repatriation.
The selling of the JPY as a result of the repatriation at the end of the fiscal year tends to decrease the value of the JPY.
Japanese traders are accustomed to taking a lunchtime hour out of the office. During this time the JPY is exposed to volatility and the forex market may experience high levels of liquidity. However, aside from this hour, the movement of the JPY is fairly consistent.
Its movement may only be disturbed by different announcements or comments made by government officials. The JPY is exposed to high volatility during the US hours, because this is the time when the US traders actively acquire USD and JPY positions.
Forex market participants pay close attention to the banking stocks since the Japanese economic crisis, which has been caused by the non-performing loans.
JPY movements can be influenced by any bank stock changes. Problems in the economy may be indicated by unmet earnings, reports of increases in non-performing loans or threat of default by banks.
The cross-currency pairs’ movements can be reflected on the movement of the USD/JPY.
The EUR/JPY and the EUR/USD currency pairs have the most influence on the movement of the USD/JPY. Thus, an increase in the value of the USD/JPY may be caused by an increase in the value of the EUR/JPY.
The EUR/JPY and the USD/JPY are also influenced by carry trades that are executed in the GBP/JPY or AUD/JPY. The JPY is characterized by low interest rates. This means that increased interest in the executed carry trades will lead to the selling of the JPY and the eventual decrease in its price.
