Profile of Japan’s Yen – Important Facts

Important facts regarding Japanese yen

First of all, Japan is considered as a proxy for Asian economic strength, having the second largest GDP on the continent. As Japanese capital markets are the most developed, in the past the country was the primary destination for foreign capital. Also, due to intense trade flows between Japan and other Asian countries, any economic or political disturbances in Japan have their immediate reflection upon other Asian economies. At the same time, any disturbances in any of Japans Asian partners can influence Japanese economy and respectively, the exchange rate of the yen.

Second, yen crosses tend to become quite active near the end of Japans fiscal year (March 31st), as export-oriented companies repatriate their assets, denominated in US dollars. This, to a large extent, matters to banking institutions, as they have to reestablish their balance sheets in order to meet requirements, imposed by the Financial Services Authority (FSA). Banks are obligated to mark to market their security positions. Repatriation-related purchases of the yen are widely anticipated by speculators in the foreign exchange market, who will likely place their bets that the national currency will increase in value due to the increased inflow. This all leads to yen devaluation following the end of the fiscal year, because speculators will probably lock in their gains.

Third, shares of Japanese banking corporations are of certain interest to currency traders. The reason for this is probably the fact that the severity of nations economic crisis was very much related with non-performing loans of Japanese banks. Any prospects of default, released weaker earnings reports and other disappointing data by these banks may imply further deterioration of economic conditions. This way movements in shares of domestic banks may lead movements in the national currency.

Fourth, as we already noted, carry trades were very popular during the past decade, because market players were constantly searching for high-yielding assets. There was a period, when the yen had the lowest interest rate of all industrialized nations, which made it the most preferred currency, sold (borrowed) in carry trades. Popular carry trade currency pairs are NZD/JPY, AUD/JPY, CAD/JPY, GBP/JPY. In these trades investors will sell the yen (respectively, buy the currency, which offers higher yields). In case the interest rate differentials narrow, this would benefit the Japanese currency – the so called reversal of carry trades includes going long the yen (respectively, going short the other currency in the pair).