What is USD/JPY Forex Trading?
The Dollar, also known as the ‘Greenback’ among traders, is the currency of the United States of America, the world’s largest economy and de facto financial leader of the world. The Yen is the currency of Japan, the world’s third-largest economy.
The USD/JPY currency pair indicates how many Japanese Yen are currently needed to purchase one US Dollar on the global forex marketplace. This exchange rate will fluctuate constantly throughout the days, weeks, and months, owing to a multitude of economic and political factors.
The USD/JPY is one of the most widely traded and speculated upon currency pairs on the planet, and for good reason. Read on to find out everything you need to know about trading USD/JPY on the global currency markets.
Read this section to learn more about what it means to trade USD/JPY on global forex markets and why so many traders do so today.
Forex trading is, simply put, the action of buying and selling various currency pairs with the intention of making profits on the fluctuation of value between these pairs.
For example, if USD/JPY is trading at 110, this means that it costs 110 Japanese Yen to purchase a single dollar.
This is especially popular for the USD/JPY currency pair, owing to the low volatility and massive volume of daily trading on this pair.
If you were to forex trade USD/JPY, you could, for example, invest in the currency pair when the value of the JPY is lower and then sell when it rises, thus making a profit from the price difference.
Forex trading is typically done as a form of day trading, meaning that pairs are often bought and sold on the same day, sometimes multiple times.
The goal is to capitalise on small price fluctuations throughout the trading day. Despite the time differences between Tokyo and New York, you can trade USD/JPY at any hour of the day.
Some recommend trading this pair between the hours of 12:00 and 15:00 GMT, as this is when London and New York markets (but not Tokyo) are open and therefore represent the time period where you are likely to see the most action and volatility.
As two of the world’s largest and most interconnected economies, the fortunes of the USD/JPY have been closely intertwined for decades, and the pair has been traded in financial centres for longer than virtually any other currency pair.
Live Chart USD/JPY
History of the USD/JPY Forex Pair
Read this section to learn all about the long and eventful history of the USD/JPY currency pair, as well as the main benefits of trading this pair on the global marketplace.
The US Dollar was created via an act of Congress in 1792, replacing a hodgepodge of currencies that were then in circulation throughout the various colonies of North America.
Meanwhile, the Japanese Yen was created by the Meiji Government in 1871, to replace the Spanish Silver Dollars that were largely in use throughout the country.
The USD/JPY were on par on a 1-1 basis for only two years, with the great silver devaluation of 1873 bringing the value of the Yen down to 0.5 against the USD.
After this, the JPY was fixed to the value of gold, which froze the value of the JPY to USD 0.50 for decades after, until the Yen left the Gold Standard in 1931, along with many other major world currencies at that time.
Following World War II, the US Government fixed the value of the Yen at 360, an exchange rate that was maintained until 1971, when the US abandoned the Gold Standard and the Bretton Woods system fell apart.
After this, the JPY was floated, meaning its value was no longer pegged to the dollar. Since then, the USD/JPY has seen some major ups and downs.
The Japanese boom of the 80s saw an undervalued JPY soar in value against the dollar, before declining sharply when the asset bubble burst.
Conversely, the 2008 crash saw the USD/JPY rise, as the value of the USD dropped sharply. Today, there are many reasons to trade USD/JPY on global currency markets, such as:
- USD/JPY has low spreads, which translates to very low trading costs.
- USD/JPY has massive liquidity, due to the huge market trading volume of this popular currency pair.
- There are many different USD/JPY trading instruments you can access, including CFDs, options, and futures.
- Investing in this relatively non-volatile currency pair usually means smooth, predictable, and easy trading.
Factors that Influence USD/JPY
Read this section for a snapshot of the main factors that will influence the USD/JPY currency pair on a daily basis.
Given that the USD/JPY represents two of the world’s most important currencies and globalized economies, there are a myriad of factors that affect the price of this pair.
Fortunately, the huge importance of the USD/JPY to the global economy also means that there is a wealth of financial resources and real-time information that you can access to help inform your USD/JPY forex trading decisions.
Both currencies are major safe-havens, so any global economic downturns tend to push the value of either one of them up.
If the Dollar wins out as a safe haven and Asia looks less appealing to jittery investors, you can expect USD to rise against the Yen. If the reverse is true, you can expect the value of the JPY to rise against the USD.
In addition, keep an eye out for any comments or announcements from the central banks – the Fed or the Bank of Japan, as virtually any decision will have an immediate impact on USD/JPY.
Furthermore, general economic indicators in both the US and Japan have a huge daily impact on USD/JPY.
For example, US employment figures, Japan inflation figures, consumer confidence, and new GDP growth figures will all have a significant impact.
The Role of the USD
Read this section to learn about the importance of the USD, its history, and the major factors that impact its value.
Although the USD is no longer the world’s de jure reserve currency, it remains the most important global currency by a wide margin; representing more than 60% of all global cash reserves.
Debt, international trade, and financial flows are dominated by the Dollar, and its value is closely tied to the economic fortunes of many, if not most, of the world’s countries. For some, a weak dollar is good, as it means the dollar-denominated foreign debt is cheaper to service.
For others, a strong dollar is preferred as this can boost imports into the US, the world’s largest consumer market. While domestic developments such as Presidential elections and labour market data play a large role in the value of the Greenback, the USD is more affected than most other currencies by global events.
Most importantly, as a “safe-haven” currency, any global economic downturn usually translates to a stronger USD relative to most other currencies.
The Role of the JPY
Read this section to learn about the importance of the JPY and the crucial factors that affect its value on the global market.
The Japanese Yen is by far the most important and widely-traded currency in Asia, representing more than 4% of all global reserves.
The Japanese economy is a global powerhouse and is the third largest on the planet. Since Japan is a top global exporter, the price of the Yen matters so much because this affects the price of Japanese exports such as cars, electronics, foodstuffs, and clothes.
Although Japan is a lynchpin of the world economy, it has become a byword for so-called “stagflation”, with low-growth (but also a lot of stability) being the norm for the past two decades.
This stability has helped to buttress the role of the JPY as a “safe haven” currency, one that does not tend to see any particularly dramatic fluctuations in value.
This does, however, make it better for day trading, where traders can capitalise on small, incremental value fluctuations rather than hoping for large peaks and troughs.
Strategies for forex trading of USD/JPY
Read this section to learn the importance of having a strategy in place when trading USD/JPY.
With forex trading of any kind, having a solid strategy in place before you begin trading is absolutely crucial. This is especially true of USD/JPY; where even the smallest market shifts can translate to significant gains and losses.
As such, when trading USD/JPY, make sure to keep these helpful tips in mind:
Look at the market fundamentals and base your activity around key events such as US GDP data, Fed interest rate decisions, BOJ borrowing decisions, or Japanese labour market data releases.
Trade during hours where you can expect peak market activity on USD/JPY – namely 12:00 to 15:00 GMT.
Have a solid exit strategy and stop-loss in place before you begin trading so that you can cut your losses and get out if things don’t go your way.
When to buy or sell USD/JPY
Read this sectionto find out more about the optimum times to hit ‘buy’ or ‘sell’ on your USD/JPY.
If the US Dollar is the base currency, you want to hit BUY on USD/JPY if you expect the value of the Yen to fall in value relative to the Dollar. Conversely, if you expect the USD to fall relative to the Yen, then you’d want to hit SELL.
Let’s walk through a couple of examples to help explain things better.
If you are reading the financial news and seeing that the BOJ is planning on developing the JPY in order to boost exports, then you would want to BUY USD/JPY, accumulating dollars in the expectation that the USD will rise and you can sell for a profit later on.
In another example, you might be seeing news that a major Japanese investor such as Softbank is pulling money out of the US, thereby converting billions of dollars back into JPY. You would want to hit SELL here, in order to dump your USD before it depreciates against the JPY.
How to Trade USD/JPY
Read this section to learn more about how you can start trading USD/JPY today.
As we have already covered, the USD/JPY is one of the world’s most important currency pairs. This means that there is a huge amount of liquidity, as the pair is being traded on an almost constant basis.
Trading USD/JPY is, therefore, one of the easiest things you can do in forex.
Once you have an account with a qualified, licensed, and reputable online forex broker, you can start trading by buying and selling real USD/JPY on the global marketplace.
You will need to deposit your necessary margin with a broker, which the broker will then use to open and hold your USD/JPY position.
You can then buy and sell immediately throughout the day in order to profit from price changes. It really is that easy.
Profit with USD/JPY
Read this guide to learn more about the ways that forex traders can profit by trading the USD/JPY pair.
The important thing to remember is that USD/JPY is incredibly sensitive to global risk and that prevailing market sentiments have a strong influence when you buy and sell. In addition, it is worth keeping in mind that the USD/JPY tends to be strongly positively correlated with major US stock indices such as the S&P 500, as well as US bond yields (i.e. 10-year treasuries).
Making a profit on USD/JPY means timing your trades just right, as this non-volatile pair requires you to make profits from the smallest market movements during the trading day.
We will talk about when to close your position further down below.
Close Your Position to Take a Profit or Cut a Loss
When trading USD/JPY, you will have to close your trades at some point, which is when you will either take your profit from your trade or accept a loss.
Either way, you should always aim to close your positions in shorter time periods (day trading), as the USD/JPY will not yield any results from a long position since it is such a docile pair.
Knowing when to close your position on a profit is a delicate balance, as waiting too long can see your profits wiped out.
It is more obvious to know when to close on a loss, as you should have a strict stop-loss and exit strategy in place anyway to minimize any losses from trading USD/JPY.
Choose a Broker & Open an Account
Read this section to learn about the importance of choosing the right broker when trading USD/JPY.
When trading a major currency pair such as USD/JPY, it is absolutely essential that you use a trusted forex brokerage platform to do so.
A quality broker will work with expert data and resources to help you make informed trades. They will offer direct market access to allow you to buy and sell at exactly the moment that you want to.
They will hold valid licenses from trusted financial regulatory bodies, to guarantee the safety of your money. To find out which brokers offer all of these crucial elements, make sure to check out our reviews of trusted forex brokers today.
USD/JPY Trading Risks
Read this chapter to learn about the major risks and drawbacks of trading USD/JPY.
Lack of general volatility. This means that some thrill-seeking traders might not find much to work with here.
BOJ interventions. The Japanese Central Bank is very keen to intervene when the value of the Yen deviates from the norm, as it aims to keep exports competitive. This can easily stymie your trading strategy.
Unpredictable events such as natural disasters can have a huge impact on the USD/JPY.
Inconvenient ideal market trading hours due to substantial time differences.
All explained, the USD/JPY is and will remain one of the world’s most important currency pairs for the foreseeable future.
There are strong indications that the economies of these two powerhouse nations will become ever more closely intertwined in the years to come, which could represent more exciting opportunities for USD/JPY forex traders.
If you’re a beginner looking for a pair with a lot of liquidity and plenty of resources for you to access, then the USD/JPY is perfect for you.