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How to Trade USD/JPY?

How to Trade the USD/JPY Exchange Rate

Introduction to Trading USD/JPY

The USD/JPY exchange rate 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 stay on top of developments on both fronts.

Moreover, given USD/JPY’s use as a gauge of overall market sentiment, investors should endeavor 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.

The History of the USD/JPY Exchange Rate

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.

Japan – Net Foreign Assets (1960-2019)

Japan – Net Foreign Assets (1960-2019)

Source :

  • The Bank of Japan’s dovish approach to monetary policy, that has seen the nation’s short-term interest rate hover around 0%, and at points in slightly negative territory, since 2000. Historically low rates make the Yen the prime candidate for carry trade strategies. This approach involves borrowing a low-yielding currency in order to buy a higher yielding alternative, to profit from the interest rate differential.

Japan Interest Rate

Japan Interest Rate

Source :

  • The Japanese government’s response to the 1990 banking crisis, where a slew of new policy measures and laws shored up the local banking system and gave authorities better tools to deal with future bank failures.

How to Trade 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 higher 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 on-coming 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 prepared by Daniel Moss, created with Tradingview

How to Trade 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.

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 prepared by Daniel Moss, created with Tradingview

Trade USD/JPY with Vantage

You can open your live trading account in less than five minutes with Vantage to start trading USD/JPY. 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!


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