Currency: Japanese Yen
Common Name: Yen
Quotation Convention: 2 decimal points
Most liquid cross: USD/JPY
Average Bid/Offer : 3 pips (110.70 / 110.73)
1 pip: 0.01 JPY
Settlement: Transaction plus two days (T+2)
Economic Indicators for Japan
Economic Overview
With a GDP of US$3.867trl, Japan has the world's fourth largest economy. Japan is the fifth largest exporter of goods in the world, which has resulted in a consistent trade surplus for the country, valued at US$99.4bln in 2005, and created an inherent demand for the JPY. Japan's largest trade partners are the U.S. and China. In recent years, China's inexpensive goods have allowed the country to gain a larger share of Japan's import market. Japan has a fairly large national debt of US$1.545trl.
Japan is among the world's largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles and processed foods. The robotics industry is a key long-term economic strength because Japan possesses more than half of the world's "working robots." As a highly industrialized nation, the country is heavily dependent on imported raw materials and fuels. The small agricultural sector is highly subsidized and protected, with crop yields among the highest in the world.
Japan's economy experienced a major slowdown in the 1990s, following three decades of record growth. Growth expectations during the 1980s led to major hikes in asset prices and rapid credit expansion, developing an "asset bubble." Between 1990 and 1997, the bubble collapsed, resulting in dramatic drops in asset and real estate prices. The net loss was equal to two years of Japan's national output. Many developers defaulted, and the country's banks were faced with bad debt and worthless collateral. The banking crisis had a major impact on the Japanese and global economies, and bad debts, falling stock prices and the collapsing real estate market have continued to plague the Japanese economy for the past two decades. The current economic crisis revolves around the resolution of the banks' non-performing loans (NPLs). The Japanese Ministry of Finance and Bank of Japan (BoJ) are still trying to resolve this problem, and have poured funds into the ailing banks to attempt to prevent bankruptcies and to grow the banks back to a healthier balance sheet. As a result, the banking sector has become very dependent on the government, and the Japanese yen (JPY) is very sensitive to political developments, including speeches by government officials that may indicate changes in monetary and fiscal policy or attempted bailout proposals.
Despite the banking crisis of the 1990s, Japan is still a major economic force. Government and industry cooperation, strong work ethic and rapid technological advances have propelled Japan to the rank of the second most technologically powerful economy in the world after the U.S.
Economic Policy Makers and Tools
The Bank of Japan directs the country's monetary policy, with a goal of maintaining stability of prices and of the financial system, thereby laying the foundations for sound economic development. The BoJ's monetary policy board determines the basic guidelines for monetary policy at its monetary policy meetings. At the policy meetings, the board assesses the economic and financial situation to determine the guidelines for the BoJ's money market operations. The results are released in the Monthly Report of Recent Economic and Financial Developments. The BoJ also releases the quarterly Tankan Survey, an economic survey of Japanese businesses, which is also used to formulate monetary policies.
The Bank of Japan conducts its daily money market operations to achieve a target money market rate by purchasing or selling Japanese government securities and bills, or by making loans to financial institutions. The BoJ supplies funds to financial institutions when it purchases government securities or bills, and absorbs funds when it sells them. Loans extended and collected by the BoJ to financial institutions are another method of controlling fund levels. By adjusting the amount of funds it supplies or takes in, and managing the timing of these adjustments, the BoJ is able to control money market rates. Money market rates, in turn, affect interest rates in other financial markets and the lending rates that financial institutions charge on loans to firms and individuals. In this way, money market rates can affect economic activity by influencing decisions made by firms and individuals.
The Minister of Finance can instruct the Bank of Japan to conduct foreign exchange intervention by buying or selling yen for foreign currencies. When the BoJ intervenes, it uses government funds, specifically those in its Foreign Exchange Fund Special Account (FEFSA). Since the introduction of floating exchange rates, Japan's interventions in the foreign exchange market have primarily taken the form of yen sales because Japan's currency has often faced rapid appreciation. When Japan's Minister of Finance deems it necessary to intervene in the foreign exchange market due to major fluctuations in the yen, he gives the BoJ instructions to conduct intervention operations in the form of foreign currency trades. There are typically three factors behind Japan's foreign exchange interventions: the amount of appreciation or depreciation in JPY, the current USD/JPY rate, and the formation and direction of speculative positions.
The Bank of Japan controls the amount of money in the economy and the interest rate on a daily basis through open market operations. The goal of these open market operations is to control the operating target, which is recognized as the uncollateralized overnight call rate. This is the shortest-term rate, and is seen as the standard rate for longer-term rates in the call market and in other markets. In order to maintain zero interest rates, the BoJ targets zero interest on the overnight call rate through its market operations. This is completed through sales and purchases of money market instruments.
Characteristics and Trends
- Economic or political problems in other Asian economies can have dramatic impacts on the Japanese economy JPY movements, and vice versa.
- JPY crosses can become very active toward the end of the Japanese fiscal year (March 31) as exporters move their dollar denominated assets.
- The JPY tends to have higher volatility during U.S. hours, and during the Japanese lunch hour, which happens between 10-11 p.m. EST.
- Because of Japan's banking crisis and the NPLs, bank stocks movements are closely watched to indicate JPY movements.
- Because the JPY has the lowest interest rate of all industrialized countries, it is the primary currency sold in carry trades.
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