The Japanese Yen
Posted On July 29, 2022
The Japanese yen is easily the most traded of Asian currencies and viewed by many as a proxy for the underlying strength of Japan’s manufacturing and export-driven economy. As Japan’s economy goes, so goes the yen (in some respects). Forex traders also watch the yen to gauge the overall health of the Pan-Pacific region as well, taking economies such as South Korea, Singapore, and Thailand into consideration, as those currencies are traded far less in the global forex markets.2
The yen is also well known in forex circles for its role in the carry trade (seeking to profit from the difference in interest rates between two currencies). The strategy involves borrowing the yen at next to no cost (due to low-interest rates) and using the borrowed money to invest in other higher-yielding currencies around the world, pocketing the rate differentials in the process.12
With the carry trade being such a large part of the yen’s presence on the international stage, the constant borrowing of the Japanese currency has made appreciation a difficult task. Though the yen still trades with the same fundamentals as any other currency, its relationship to international interest rates, especially with the more heavily traded currencies such as the U.S. dollar and the euro, is a large determinant of the yen’s value.