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Trading the USD/JPY Currency Pair

TABLE OF CONTENTS

Trading the USD/JPY Currency Pair

Trading the USD/JPY Currency Pair

Vantage Updated Updated Tue, 2024 April 16 04:53

What is USD/JPY

The USD/JPY is one of the most liquid, and most frequently traded, currency pairs in the world. The Japanese Yen and US Dollar are both commonly known as haven-associated, or anti-risk, currencies. 

In fact, the two currencies together account for 66% of the world’s official foreign exchange reserves, according to data from the International Monetary Fund. This means that it can be vitally important for traders to stay on top of developments on both fronts. 

Moreover, given USD/JPY’s use as a gauge of overall market sentiment, investors should endeavour to understand what the fundamental drivers of this highly influential exchange rate are, and the most appropriate technical strategies to use when looking to take long or short positions.

Key Points

  • The USD/JPY currency pair is highly liquid and frequently traded, with both the US dollar and Japanese yen seen as safe-haven currencies, which traders focus on due to their significant role in global forex reserves and their impact on market sentiment.
  • Historical events and economic policies, including Japan’s post-war recovery, the “Lost Decade,” and the Bank of Japan’s monetary strategies, have significantly influenced the USD/JPY’s trading dynamics and value fluctuations over time.
  • Trading USD/JPY offers opportunities due to its sensitivity to economic indicators, policy changes, and high liquidity, with strategies for trading including technical analysis, swing trading, and leveraging economic news, catering to a wide range of trading styles and time frames.

The History of USD/JPY

The Japanese Yen is the third most frequently traded currency in the world and is commonly known as an ‘anti-risk’ asset due to its stronger performance in times of increased market volatility and uncertainty. 

This outperformance comes on the back of several fundamental factors: 

Japanese investors have historically allocated more money internationally than domestically, resulting in the nation’s net foreign assets outweighing its net foreign liabilities. This leads to a surge in JPY when global market sentiment sours and ultimately results in local investors liquidating their international positions, thereby repatriating their funds back into Japanese Yen.

Yen Adoption in 1871 by the Meiji Government

In 1871, the yen was officially adopted by the Meiji government of Japan as the nation’s official currency. The new yen currency was based on the decimal system and replaced the previous traditional mon and koban coins issued by feudal han [1]


The introduction of the yen was a step towards modernising Japan’s economy and aligning it with Western standards. Sure enough, this move encouraged foreign investment and trade with Japan.

As a result, the USD/JPY currency pair started to develop as international traders and investors sought to exchange their US dollars for Japanese yen to participate in Japan’s growing economy. This early phase set the stage for the USD/JPY pair to become one of the major currency pairs in the global forex market. 

Post-War Era (World War II)

After World War II, Japan’s economy was in ruins, and the yen underwent significant changes. In 1944, The Bretton Woods agreement created a new international monetary order with the US dollar at its centre.

This established fixed exchange rates, and the yen was pegged to the US dollar at a rate of 360 yen per US dollar. This peg helped stabilise Japan’s economy and played a crucial role in its post-war recovery.

This stability made it easier for businesses and investors to engage in international trade and investment with Japan. The USD/JPY pair was a key part of this stability as it provided a reliable means of exchanging US dollars for yen and vice versa.

This era contributed to the development of a deep and liquid USD/JPY market.

Major Historical Events — Lost Decade

The “Lost Decade” was a period of economic stagnation in Japan during the 1990s and early 2000s. It was characterised by a burst real estate bubble, deflation, and sluggish economic growth.

During this period, the Japanese economy, as measured by GDP, grew only 1.14% annually from 1991 to 2003 [2]. This had a profound impact on USD/JPY trading, with the yen experiencing significant fluctuations.

During this time, the Bank of Japan implemented unconventional monetary policies, including low interest rates and quantitative easing, to combat deflation and stimulate economic growth.

From 2003-2004, there was a notable period of unusual interventions taken by the BOJ in the forex market. As the Japanese yen was at risk of appreciating significantly against other major currencies, it threatened to affect Japan’s export-oriented economic model.

The BOJ responded by selling over $300 billion worth of yen in the forex market over the course of the year, making it one of the biggest and most sustained interventions by a central bank in forex market history [3].

These policies led to periods of yen depreciation which boosted the USD/JPY pair as traders and investors sold yen and bought US dollars in anticipation of further policy measures.

Bank of Japan’s Monetary Policy

Japan’s central bank, the Bank of Japan, plays a pivotal role in shaping the nation’s monetary policy.

The BOJ employs various tools and policies aimed at influencing key economic factors such as interest rates, inflation levels, and overall economic growth. Among its notable policies are the zero interest rate policies (ZIRP) and quantitative easing (QE) measures, specifically designed to combat deflationary pressures.

The BOJ’s monetary policy decisions have had a direct impact on the USD/JPY pair. For instance, when the BOJ adopts a policy of low interest rates or engages in QE, it typically results in a weakening of the Japanese yen.

A weakened yen enhances the competitiveness of Japanese exports and can stimulate economic growth. This often leads to an upward trajectory in the USD/JPY pair, as traders gravitate towards higher-yielding assets denominated in US dollars.

Conversely, when the BOJ tightens its monetary policy, it tends to strengthen the yen. This shift can prompt a downward trend in the USD/JPY pair as investors seek the relative stability and higher interest rates associated with the yen.

Why Trade USD/JPY Currency Pair?

The United States and Japan are two of the largest economies in the world and their currencies, the US Dollar (USD) and the Japanese Yen (JPY), reflect the economic health and stability of these nations.

Trading the USD/JPY pair offers several benefits:

Firstly, it is highly liquid, meaning there is a large volume of trading activity, which can lead to tighter spreads and lower transaction costs.

Secondly, the pair is sensitive to economic indicators and policy changes from both the US Federal Reserve and the Bank of Japan, providing ample opportunities for traders to capitalise on market volatility.

Lastly, the time zone difference between the US and Japan allows for nearly 24-hour trading, offering flexibility for traders around the globe.

Historical Trends of USD/JPY Market [4]

Here is a look at the historical trends of the USD/JPY currency pair.

2008

The 2007–2008 financial crisis, or the Global Economic Crisis (GEC), was the most severe worldwide economic crisis since the Great Depression. 

In 2008, the USD/JPY exchange rate experienced a significant decrease. The year started with the USD valued at 109.70 JPY. However, by the end of the year, the USD had depreciated to 90.79 JPY, marking an annual decrease of 18.73%.

2010

The continued depreciation of the USD against the JPY in this year was indicative of the slow recovery from the financial crisis and the relative strength of the Japanese economy during this period.

The USD started the year at 92.55 JPY and ended at 81.67 JPY, representing a decrease of 12.26%.

2022

Contrary to the previous years, 2022 saw a significant appreciation of the USD against the JPY. The USD started the year at 115.11 JPY and ended at 131.12 JPY, marking an increase of 13.91%. 

USD/JPY Prediction

Chart 1: USD/JPY performance from Jan 2023 – March 2024 (https://www.tradingview.com/x/qN5MRxHo/

Looking ahead, the USD/JPY exchange rate is expected to continue its upward trend. According to projections from Trading Economics, the USD/JPY is forecasted to be priced at 151.551 by the end of the current quarter and at 152.277 in one year at the time of writing [5].

What Moves the USD/JPY Exchange Rate

Central Banks Decision

Central banks, notably the Bank of Japan and the Federal Reserve in the United States, wield considerable influence over the USD/JPY pair through their monetary policy decisions. These decisions encompass changes in interest rates, the implementation of quantitative easing (QE) measures, and the issuance of forward guidance. 

When a central bank adjusts interest rates, such as raising them, it can make its currency more attractive to investors seeking higher returns, potentially strengthening the currency against its counterparts.

Economic Indicators

Various economic indicators provide insights into the health of both the US and Japanese economies. These indicators include Gross Domestic Product (GDP), employment data, inflation rates, and consumer sentiment.

Positive economic data in the United States, such as strong GDP growth or low unemployment, can boost the value of the US dollar, making the USD/JPY rise.

Conversely, robust economic data in Japan can strengthen the yen and lead to a decline in USD/JPY.

Safe-Haven Flows

USD/JPY is often influenced by safe-haven flows, especially during times of global economic uncertainty or geopolitical instability when investors often seek safe-haven assets.  

Historically, the US dollar and Japanese yen are considered safe-haven currencies. This means investors tend to buy them during turbulent times, leading to an increase in demand for both currencies.

When there is a surge in safe-haven demand, USD/JPY may remain relatively stable or even decline as investors seek refuge in both currencies.

Interest Rate Differences

Interest rate differentials between the United States and Japan have a significant impact on USD/JPY.

When the US Federal Reserve raises interest rates or signals a more hawkish monetary policy stance, it can attract foreign capital into US assets, strengthening the US dollar and potentially causing USD/JPY to rise.

Conversely, if the Bank of Japan takes a more hawkish stance by raising interest rates, it can lead to a stronger yen and a potential decline in USD/JPY.

Trade Balances

Trade balances between the two countries can affect USD/JPY. A trade deficit (when a country imports more than it exports) can put downward pressure on the currency.

If the US has a trade deficit with Japan, it may lead to a weaker US dollar and, consequently, a lower USD/JPY rate.

Conversely, if Japan has a trade deficit with the US, it can lead to yen depreciation and a potential increase in USD/JPY.

USD/JPY Correlations

Positive Correlations [6,7]

U.S Treasury Yields

The USD/JPY exchange rate shows a positive correlation with U.S. Treasury yields. When U.S. Treasury yields increase, it often leads to a strengthening of the USD, which in turn causes the USD/JPY exchange rate to rise.

CAD/JPY

The USD/JPY exchange rate also shows a strong positive correlation with the CAD/JPY exchange rate. This is because both pairs are influenced by similar factors, such as the strength of the U.S. dollar and global economic conditions.

SGD/JPY

The USD/JPY exchange rate is positively correlated with the SGD/JPY exchange rate. This is because both pairs are influenced by the strength of the US dollar. Changes in the US economy, interest rates, and market risk can simultaneously affect both pairs.

Negative Correlations [8,9]

Gold Prices

The USD/JPY exchange rate has a negative correlation with gold prices. When gold prices rise, it often leads to a weakening of the USD, which in turn causes the USD/JPY exchange rate to fall.

EUR/USD

The USD/JPY exchange rate shows a negative correlation with the EUR/USD exchange rate because they share the USD as a common currency. This means that when the EUR/USD exchange rate rises, the USD/JPY exchange rate tends to fall.

AUD/USD

Similarly, the USD/JPY exchange rate is also a major currency pair negatively correlated with the AUD/USD exchange rate due to their common currency of USD. This means that when the AUD/USD exchange rate rises, the USD/JPY exchange rate tends to fall.

Trading USD/JPY Using Fundamental Analysis

A range of underlying fundamental variables impact the risk-gauging USD/JPY exchange rate. Traders ought to be aware of them and their possible impact on the currency pair. 

Central Bank Monetary Policy Settings

  • A pivotal role is often played by the United States Federal Reserve and the Bank of Japan’s monetary policy settings as well as the prevailing trend in expectations for their future path. Speculation about on-coming changes in traditional and unconventional monetary policy measures can be explosively market-moving

Market Participant Sentiment and Risk Appetite 

  • Market-wide sentiment can also have a strong impact on the USD/JPY, with periods of high volatility and uncertainty normally coinciding with JPY strengthening against USD to lead the exchange rate lower. A notable spike in the CBOE Volatility Index (VIX) – the market’s so-called “fear gauge” – usually coincides with a significant downturn in USD/JPY.

Economic Data Points

  • Economic data can have a strong influence on USD/JPY, with GDP, CPI, employment and PMI economic data releases all potentially informing forecasts for an upcoming monetary policy response from the Fed and/or the BOJ.

US Treasury Yields 

  • USD/JPY rates also appear to have a relatively strong positive correlation to US 10-year Treasury yields, which might be another reflection of the pair’s sensitivity to changes in overall risk appetite. Generally, falling bond yields suggest that market participants are seeking ‘safe haven’ assets. It is perhaps not surprising then that USD/JPY and bond yields tend to chart a similar course. Of course, correlation is not causation. Nevertheless, it is probably wise to keep this relationship in mind.
How to Trade USD/JPY - US Treasury Yields
Chart 2: Prepared by Daniel Moss, created with TradingView 

Given the high liquidity of the forex market, fundamental analysis offers valuable insights into the economic, political, and global factors driving currency movements, enabling traders to make informed decisions and manage risk effectively.

Stay up to date and gain access to real-time data by regularly consulting Vantage’s economic calendar and sentiment indicators.

Trading USD/JPY Using Technical Analysis

Due to its popularity and high volume of market participation, USD/JPY is often a favoured currency pair for technical traders. The pair has been known for its adherence to major psychological chart barriers and for its tendency to move sharply away from major support and resistance levels. 

Price Action Trading

This method relies on analysing historical price movements and patterns on price charts to make trading decisions. Here are some key aspects of using price action trading for USD/JPY:

Candlestick Patterns: Price action traders often focus on candlestick patterns to identify potential entry and exit points. Patterns like doji, hammer, engulfing patterns, and shooting star can provide insights into market sentiment and potential reversals.

Support and Resistance: Identifying key support and resistance levels is essential. Traders look for areas where prices have historically stalled or reversed, which can serve as potential entry or exit points.

Trend Analysis: Price action traders assess the overall trend by looking at patterns such as higher highs and higher lows for an uptrend and lower highs and lower lows for a downtrend. This helps in determining the direction of their trades.

Price Patterns: Traders also watch for chart patterns like head and shoulders, double tops, and triangles. These patterns can offer clues about potential price movements.

Indicator Trading

USD/JPY rates also appear to frequently carve out Symmetrical Triangle consolidation patterns, with breakouts normally resulting in the establishment of a primary trend. 

The MACD indicator can be used to filter buy and sell signals when trading USD/JPY, with multiple bearish crossovers – in December 2017 and June 2020 – and bullish crossovers – in January and August of 2019 – appearing to signal a significant shift in trend.

How to Trade USD/JPY Using Technical Analysis
Chart 3: Prepared by Daniel Moss, created with TradingView

Risk Management

Risk management is a crucial aspect of trading the USD/JPY pair. Given the inherent volatility of the forex market, traders are exposed to potential losses that can exceed their initial investment.

Therefore, implementing effective risk management strategies is essential. 

These strategies may include setting stop-loss and take-profit levels to limit potential losses and secure profits, respectively. Diversifying one’s portfolio to spread risk across different currency pairs and asset classes is also a common practice. 

Additionally, traders should keep abreast of economic news and indicators, as these can significantly impact the USD/JPY exchange rate.

Strategies to Trade USD/JPY

Trading USD/JPY requires various strategies depending on your trading style, risk tolerance, and market conditions. Knowing when to use which strategy is important when attempting to profit from the natural fluctuations between the currency pair. 

Here are some popular forex trading strategies you can execute when trading USD/JPY.

Swing Trading

Swing trading is a trading strategy that focuses on capturing shorter- to medium-term price swings within financial markets. Swing traders typically hold positions for several days to weeks, aiming to profit from price fluctuations during this timeframe. They employ technical analysis tools, such as chart patterns and indicators, to identify potential entry and exit points.

Swing trading strikes a balance between the shorter time frame of day trading and the longer-term perspective of buy-and-hold investing, making it a popular choice for traders with other commitments who seek to benefit from market volatility.

News Trading

News trading involves capitalising on short-term price movements in financial markets following the release of important economic or geopolitical news events. This strategy involves monitoring economic calendars for scheduled data releases (e.g., employment reports, interest rate decisions, GDP figures) and unexpected news (e.g., geopolitical developments, corporate earnings reports). 

The goal is to quickly analyse the impact of these events on asset prices and execute trades to profit from the resulting volatility.

Position Trading

Position trading is a longer-term investment strategy that involves taking positions in financial markets with the intention of holding them for an extended period, often months or even years. 

Position traders base their decisions on fundamental analysis, such as macroeconomic trends, company financials, and geopolitical factors, to identify assets with long-term growth potential. They aim to capitalise on major trends and market cycles, seeking to benefit from substantial price movements over time.

Read all about the difference between swing trading and position trading to help you determine which strategies to use.

Carry Trade

With this carry trade, investors borrow money in a currency with a low interest rate (often referred to as the “funding currency”) and invest it in a currency with a higher interest rate (known as the “target currency”). The goal is to profit from the interest rate differential, known as the “carry,” between the two currencies. Traders earn money from the interest rate spread as long as the exchange rate remains relatively stable or moves favourably in their direction.

Price Breakout

The price breakout strategy involves identifying key support and resistance levels on a price chart and entering a trade when the price breaks out of these levels. When the price surpasses a resistance level, traders often interpret it as a bullish signal, suggesting potential upward momentum, and they may go long (buy). Conversely, when the price breaks below a support level, it’s seen as a bearish signal, indicating potential downward momentum, and traders may go short (sell).

Trade USD/JPY via CFDS with Vantage

You can open your live trading account in less than five minutes with Vantage to start trading USD/JPY via CFDs. Vantage also provides a free demo account, which will allow you to practice various trading strategies and techniques without having to deploy your own capital. Follow the link below to find out how you can get started!

FAQs for USD/JPY Trading via CFDs

What is the spread on USD/JPY via CFDs at Vantage?

The spread on USD/JPY at Vantage is competitively low. Vantage offers ultra-competitive spreads starting at 0.0 pip for RAW ECN accounts, and 1.0 pip for Standard STP accounts. Spreads are subject to change based on market conditions.

What are the risks of trading USD/JPY via CFDs?

Trading USD/JPY via CFDs carries certain risks. These include:

  • Volatility: The forex market is inherently volatile, and the USD/JPY pair is no exception. Unexpected price swings can occur, leading to potential losses.
  • Margin Trading: Borrowing money from brokers to enhance market exposure can magnify both potential profits and losses.
  • Economic and Geopolitical Events: Big events in the U.S. and Japan can cause large price movements.
  • Interest Rate Changes: The interest rates set by the Bank of Japan (BoJ) and the Federal Reserve (Fed) can significantly influence the USD/JPY price.

Is USD/JPY a good pair to trade?

The USD/JPY pair is one of the major currency pairs in the forex market and is widely favoured by traders due to its high liquidity, volatility, and low spreads.

What are some additional tips for trading USD/JPY via CFDs?

Here are some additional tips for when you trade the USD/JPY currency pair via CFDs:

  • Stay Informed: Keep a close eye on economic calendars and news sources. Be aware of scheduled announcements and events that may influence the currency pair.

    Be up to date with the latest market events and news with the Vantage economic calendar and market news.
  • Use Technical Analysis: Utilise technical analysis tools, such as charts and indicators, to identify potential entry and exit points.
  • Understand Market Fundamentals: Consider basing your trade activity around key events such as US GDP data, Fed interest rate decisions, BOJ borrowing decisions, or Japanese labour market data releases.
  • Trade During Peak Market Hours: The forex market is open 24/5, but the Asian trading session (Tokyo) often offers unique opportunities for trading the USD/JPY due to higher activity.
  • Implement Risk Management Strategies: Use stop-loss orders and take-profit orders to manage your risk effectively.

References

  1. “The History of Japanese Currency – Bank of Japan”  https://www.imes.boj.or.jp/cm/english/history/content/ (Accessed 11 September 2023)
  2. “The Lost Decade: Lessons From Japan’s Real Estate Crisis – Investopedia” https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp#citation-1 (Accessed 11 September 2023)
  3. “Japanese Yen Analysis: A Primer on Past BOJ Interventions and USD/JPY Levels to Watch – Forex” https://www.forex.com/en-ca/news-and-analysis/japanese-yen-analysis-a-primer-on-past-boj-interventions-and-usdjpy-levels-to-watch/ (Accessed 11 September 2023)
  4. “Dollar Yen Exchange Rate (USD JPY) – Historical Chart – macrotrends” https://www.macrotrends.net/2550/dollar-yen-exchange-rate-historical-chart Accessed 22 March 2024
  5. “USDJPY US Dollar Japanese Yen – Trading Economics” https://tradingeconomics.com/usdjpy:cur Accessed 22 March 2024
  6. “USD/JPY: What It Is, Strategies, and Influences – supermoney” https://www.supermoney.com/encyclopedia/usd-jpy-correlation Accessed 22 March 2024
  7. “USDJPY Top Correlation – myfxbook” https://www.myfxbook.com/forex-market/correlation/USDJPY Accessed 22 March 2024
  8. “USD/JPY: What It Is, Strategies, and Influences – supermoney” https://www.supermoney.com/encyclopedia/usd-jpy-correlation Accessed 22 March 2024 
  9. “Negative Correlation Forex Pairs – The Forex Geek” https://theforexgeek.com/negative-correlation-forex-pairs/ Accessed 22 March 2024
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