Profile of Japans yen – overview of economy
This lesson will cover the following
- Economic overview
- Monetary policy authority
- Monetary policy tools
Japan is the third largest economy in the world with a nominal GDP of 4.9 trillion USD in 2013, according to the International Monetary Fund, while in terms of purchasing power parity it is the fourth largest economy (with a GDP of 4.7 trillion USD in 2013). Japanese Gross Domestic Product at purchasing power parity per capita is the 22nd largest as of 2013 (36 899 USD).
The country is the third largest automobile manufacturer worldwide, with annualized production of 9.9 million vehicles in 2012. Japan was the largest car manufacturer in 2000, but its market share dropped recently, because of the intense competition by countries such as South Korea and China. During the first quarter of 2008 Toyota passed General Motors and obtained the status of worlds largest car producer.
Nations electronics industry is the largest in the world, despite that Japanese companies have recently been faced with fierce competition by producers from South Korea and Taiwan. Electronics sector in Japan is renowned for a number of vital innovations (the transistor radio and the Walkman by Sony, the VHS recorder by JVC, the solar cells and LCD displays by Sharp, the first mass-developed laptops by Toshiba).
At present Japanese highly diversified manufacturing industry has focused mainly on high-tech and precision products, such as Hybrid vehicles, optical instruments and robotics, with the sector accounting for 18% of the GDP in 2012 and 24% of the GDP in 2013.
The sector of services accounts for almost 75% of overall output. Financial and insurance sectors contributed to 5.8% of the overall GDP in 2012, retail and wholesale trade – 12.5%, while transport and communications segment accounted for 6.8%. The Tokyo Stock Exchange is the second largest worldwide by market capitalization. 2 292 companies were listed on it with a combined market capitalization of 4.5 trillion USD in November 2013. The Tokyo Stock Exchange and Osaka Securities Exchange merged on January 1st 2013 to form an entity called Japan Exchange Group (JPX).
Japan is the largest creditor nation in the world for a 22nd consecutive year as of 2013, running a considerable net international investment surplus. Japan is also the second largest sovereign state in the world by global private financial assets, payable in currency, stocks and bonds in 2013 (13.991 billion EUR, following the United States).
As the country is in possession of insufficient natural resources to support its expanding economy and huge population, its exported goods are engineering-oriented and research and development-led, while its imports consist mainly of raw materials and petroleum. The total value of nations exports was 792.9 billion USD in 2012, while the total value of imports was 856.9 billion USD. Generally the country has had consistent trade surplus, which provided inherent demand for the national currency. According to CIA World Factbook, in 2012 Japans major export partners were: China (with a share of 18.1% of overall exports), the United States (17.8%), South Korea (7.7%), Thailand (5.5%), Hong Kong (5.1%).
At the same time, in 2012 Japans major import partners were: China (with a share of 21.3% of overall imports), the United States (8.8%), Australia (6.4%), Saudi Arabia (6.2%), UAE (5.0%), South Korea (4.6%).
Monetary policy authority – Bank of Japan
Bank of Japan (BoJ) is the central bank of Japan and a key monetary policy making entity. In 1998 the Japanese government provide the bank with operational independence from the Ministry of Finance and complete control over monetary policy. The missions of BoJ include the issuance and management of banknotes, monetary policy implementation, settlement services and financial stability, activities in international financial markets. The Policy Board of the bank is comprised by the governor, two deputy governors and six other members.
BoJ conducts policy meetings twice every month, while press releases and briefings are published immediately. The bank publishes a Monthly Report and a Monthly Economic Report, which are of certain interest to investors, as they provide hints over possible changes to monetary and fiscal policy measures.
The Ministry of Finance (MoF) and Bank of Japan has had a number of interventions in the foreign exchange market in order to manipulate the exchange rate of the yen in favor of Japans economic interests. As exports are the major driving force of nations economy, both institutions have preferences for a cheaper national currency. In case the yen gains strength too fast against the US dollar, the euro or other major currencies, officials from MoF and BoJ are very likely to express concerns regarding the exchange rate of the yen. Any comments, remarks, statements on the matter will surely cause movement in the currency market.
A major tool, which Bank of Japan uses in order to exercise control over monetary policy, is its open market operations. As the central bank has maintained its benchmark interest rate in proximity to zero for a while, another way to implement its policy is manipulating liquidity via open market operations. We discuss this policy tool in our Forex Trading guide.