intro – jpy: japanese yen
JPY i.e. Japanese Yen is the currency of Japan. JPY is the third most traded currency in global foreign exchange markets after USD and EUR. In addition, JPY is also a global reserve currency after USD, EUR and GBP. Bank of Japan is Japan’s central Bank and authorised to issue JPY. It was founded after the Meiji Restoration, in addition to the currency JPY. The name “Yen” translates to “round object” or “circle”.
Fx pairs with JPY are quite volatile near the end of Japans fiscal year (March 31st). This is because Japanese companies repatriate their assets, denominated in USD. This tends to cause devaluation of JPY, as large Hedge funds and institutional investors fold their JPY bets. JPY has traditionally been a favourite carry trade currency. Due to sustained low interest rates, investors and speculator use JPY to borrow in, and invest in higher yielding assets. This creates considerable sell side pressure on JPY.
JPY is a fiat currency and free float in global fx markets. It has come to be known as the gateway currency for investing and trading in Asia. This is because, Japan is the most advanced economy in Asia and JPY is cheap to borrow in. JPY is also part of the Special Drawing Rights basket of currencies at the IMF(International Monetary Fund), along with USD, GBP, EUR and RMB(Chinese Renminbi).
JPY origins
In the 19th century, silver Spanish dollar coins were used throughout Southeast Asian trading routes, the China coast, and Japan. Consequently, to save costs of bringing the silver coins minted in Latin America to Asia, local silver coins had to be minted.
First one of these was the Hong Kong silver dollar coin that was minted in Hong Kong between 1866 and 1869. However, the Chinese were slow to accept unfamiliar coinage and preferred the familiar Mexican dollars. Therefore, the Hong Kong government ceased minting these coins and sold the mint machinery to Japan.
The Japanese then decided to adopt a silver dollar coinage called Yen, meaning ‘a round object’. The yen was officially adopted by the Meiji government in an Act signed on June 27, 1871. At this point, the yen was equal to a Mexican dollar(due to same weight in silver). Mexican dollar, like all dollars, descended from the “Spanish Pieces of eight”, and up until 1873 all the dollars in the world had more or less the same value.
JPY in 20th century
By late 19th century, JPY devalued against USD and CAD, since US and Canada adhered to a gold standard. Hence, by 1897 JPY was worth only about USD 0.50.
JPY further devalued against USD following WWII, due to high inflation in post war Japan and this trend continued until 1971. However, a devalued Yen helped Japanese exports, as they were cheaper for international consumers. When USD left the gold standard in 1971, JPY joined the free float exchange rate mechanism.
In the 1980’s, there was a large net outflow of capital from Japan. Due to low JPY interest rates, Investors borrowed in JPY and bought USD for buying up international assets. Therefore, despite of trade surplus in Japan in the 1980’s, JPY did not appreciate. However, there was strong demand for Japanese industrial and electronic products globally. This was because they were high quality and reliable products, generally cheaper than domestic equivalent. This then caused the Yen to peak at about 80 Yen to 1 US Dollar.
By 1990’s, the Japanese real estate and stock prices had inflated beyond fair value. There was high degree of over-confidence in the asset prices. However, appreciation of the Yen in the 1980’s eroded the Japanese economy. This was because the economy was led by exports and capital investment for exports. To solve this problem, BoJ followed a policy of monetary easing. Also, the Japanese Govt. started a large programme of public investment. This led to the Japanese asset price bubble burst, causing asset prices to crash. This period is known as ‘The Lost Decade’ in Japan.
BoJ monetary policy in 21st century
The Bank of Japan(BoJ) had kept a zero interest rate policy with zero inflation target since 1999. This has led to negative rates and deflationary pressure on JPY. This also made JPY weaker compared to most developed economies with large GDP. This in turn, makes Japanese exports cheaper for foreign consumers. While at the same time, making imports expensive for Japanese. However, since 2013, BoJ has been buying up Japanese Govt. Bonds, to meet it’s new target of 2% inflation.
final comments
It is important to spend some time learning the history and basics. This time spent will yield dividends when you are trying to predict movement of an asset. Also remember that you are more rational before you place a trade. So, it’s important to set some rules. If you like market conditions and they fit what your rules suggest, go for it. If the conditions for the rules don’t fit what you see in the markets, don’t trade for it’s own sake. You don’t have to trade every day. The point of having rules is to run them to your favour, and not let them run you.
Day trading follows the same rules we use for life. Successful trading is the art of using knowledge and skills at the right time. It is also essential to set some limits once you open a position. For example, you may impose a limit on yourself to not keep a trade open for more than 20 days. Finally get access to good tools that can help you achieve your trading goals. It’s best to try out a lot of things on paper money accounts before risking your capital.
Despite of all the rules, limits and right mindset, random events will happen. So always have a contingency plan. A perfect system or rules don’t exist. And, this is a good thing. Otherwise, someone will work it out and own half of the free world. All algorithms, tools, systems and rules are based on a snapshot of data. So always pay attention to news and data on a given day.
how to apply this to trading
STOKAI provides daily fx prediction using algorithms based on all factors that impact the price of given currency pair. Then, it evolves this over 10 days in the future. Tutorial and brief user guide is available here – Tutorial
Stokai is a product of Rumble Horse Tech ltd. A company registered in England.