The most frequently traded currencies on the FX market (by volume) are the United States dollar, the Euro and the Japanese yen. This also means that the Japanese yen (JPY) is the most traded of all the Asian currencies – by a huge margin. It is also the most commonly held Asian currency for reserve currency holdings.
ISO 4217 code: JPY
Alternative abbreviation: JP¥
The Japanese yen was created by the New Currency Act of 1871 but the Bank of Japan wasn´t established until 1882. When the Japanese yen was first introduced, 1 yen was worth 1.5 grams of gold.
What´s the gopher?
Gopher is the nickname for the USD/JPY currency pair. It´s the most traded currency pair involving the JPY. Many traders like its high liquidity and many platforms offer USD/JPY trading with very tight spreads.
Notable recent events
- In Februari 2019, the new free trade deal between Japan and the European Union came into effect, thus creating the world´s largest free trade market.
- In October 2020, Japan and the United Kingdom signed the UK´s first post-Brexit free trade agreement.
One reason why the Japanese yen is such a heavily traded currency is the carry trade where Forex traders seek to profit from the difference in interest rates between Japan and countries such as Australia. The trader obtains a low-interest loan in Japanese yen and use the borrowed money to invest in higher-yielding currencies, such as the Australian dollar.
Due to the immenseness of this carry trade, the FX market value of the JPY is heavily influenced by foreign interest rates, especially those associated with other heavily traded currencies.
Economy and monetary policy
As always, understanding the national economy and the government´s monetary policy is one of the keys to understanding and predicting what happens to a currency.
The Japanese economy is a highly developed free-market one, where the Bank of Japan is struggling to turn deflation into inflation. Their current goal is 2% inflation, but the estimation for 2020 is -0,1% (a slight deflation).
This is the third-largest economy in the world by nominal gross domestic product, and the major industries are motor vehicles, electronic equipment, machine tools, steel, nonferrous metals, ships, chemicals, textiles, and processed foods. For the year 2019, the GDP growth was 0.7%.
Japan is a heavily populated country and home to over 125 million people. The labour force, however, consists of less than 69 million people. In August 2020, the umployment rate was 3%.
Estimations for 2020
Nominal GDP: 4.9 trillion USD
GDP per capita: 39,048 USD
GDP growth: -5.3% estimated for 2020
Japanese yen background
As a part of the Bretton Woods system, the exchange rate of the JPY/USD was fixed at 360 JPY = 1 USD after the end of the Second World War. When the Bretton Woods system was abandonned in the early 1970s, the yen was allowed to float for a while, but in 1973 the Japanese government established a new monetary policy and created a ”dirty float” regime for the yen. Their aim was – and still is – to boost the Japanese export economy by keeping the value of the yen down in relation to major world currencies such as the USD.
In the mid-1980s, this policy became especially difficult to stick to, as a number of powerful economies signed the 1985 Plaza Accord. As a result, the yen rose from 239 JPY per 1 USD in 1985 to 128 JPY per 1 USD in 1988.
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