Japan is the third largest economy in the Globe with its gross domestic product valued at over 4.7 trillion, only exceeded by China and the United States. Japan exports a large number of goods. Exports of cars and electronics account for a large portion of their exports, and they contribute more than 15% of GDP. This makes the Japanese yen to be very sensitive to the growth of the country and vice versa. Japan has been running a trade surplus for many years, but the tsunami that occurred in 2011 resulted in Japan being a net importer of oil and created an imbalance in their trade sector, where the value of exports was exceeded by the oil imports. The situation began to loosen in 2015 when the Yen started to depreciate and oil prices were falling. This returned Japan to a surplus nation. When a country is running a trade surplus, it means that the demand for its currency will remain elevated even when interest rates are at lower levels.
The most important trade partner in Japan is the United States, South Korea, China, Taiwan, and Hong Kong. In the 1980s Japan had a very attractive capital market and investors were flocking to it. The capital markets of Japan were the most developed in Asia, with a very robust banking sector. During the time, the country was fast growing with very low inflation. This resulted in a euphoric buying of Japan's assets and expansion of credit, which led to a development of an asset bubble. When the bubble burst in the latter years of the 1990s, 10 trillion dollars was wiped from the markets and this resulted in a banking crisis. The crisis got exacerbated when some of the biggest institutions started to default on their debts. Since these banking institutions accounted for the majority of corporate funding, the crisis affected other parts of the Globe.
When Shinzo Abe became the prime minister in 2012, he introduced Abenomics, which turned around the economy of Japan. He used economic growth strategies, monetary policy, and fiscal policy to fight stagflation and stimulate growth. The Japanese Yen is a proxy for Asian strength or weakness since it has the largest GDP in Asian territory outside of China. Japan is a major trading partner with most Asian countries. Therefore, economic stability in Japan will have a significant impact on other Asian nations. The Bank of Japan has a long history of intervening in the foreign exchange markets when they feel like its currency is overvalued or undervalued. Before the Bank of Japan intervenes in the FX market, it will first consider some factors like speculative positions. The bank of Japan tends to buy the JPY when a lot of speculators are selling the Yen. This will intensify the reversal of the currency pair due to the flow of stops.
The Yen tends to be very active at the end of the fiscal year because dollar-denominated assets will be repatriated by exporters to window dress their balance sheets. Japanese equities and bonds have a strong correlation with the USD/ JPY. The Nikkei is directly proportional to the movements of the USD/ JPY, which means when the pair is rising, the Nikkei is appreciating as well. The yield difference between the 10-year yield of the United States and the 10-year yield of Japan is also an important indicator for the USD/JPY. The performance of the pair is highly impacted by the carry trades since they maintain the lowest interest rates among developed countries. Investors tend to sell or borrow the Yen when executing carry trades. Therefore, when markets are risk averse, there will be a demand for the Yen, which will increase its price.
Japan is a manufacturing-orientated country; therefore, manufacturing data will have a significant impact on the Yen. However, on a short-term basis, unless the released data was not expected, fundamental reports hardly move the Yen. The most market-moving events are the monetary policy reports and the trade balance. Besides the trade balance and the monetary policy statement, the Tankan survey can be very influential on the movement of the Yen. The Tankan report is reported once every quarter. In this survey, more than 9,000 companies are surveyed and grouped into four categories, which are principal, large, small, and medium enterprises. This report is closely watched by market participants and provides a view into the business climate in Japan. The balance of payments can provide traders with insights into Japan's capital flows and this report is published semi-annually and monthly.
The Japanese labour markets are one of the most followed fundamental indicators, and they can serve as a leading indicator of economic activity. The GDP and industrial production reports are also closely watched by market participants. The GBP, also known as the British pound, cable, and Sterling is very liquid and 6% of all currency trading involves the Sterling as either a quote or base currency. The capital markets of the United Kingdom are highly developed and this accounts for the liquidity that is present. The GBP has one of the highest interest rates among developed economies. New Zealand and Australia can have higher rates than the British pound, but their financial markets are not as developed as those of the UK. Therefore, investors who wish to execute carry trades, tend to lend or buy the British pound against the Yen. When interest rates spread between the British pound and other currencies decrease, volatility will increase in the sterling.
Traders can look for indications of expected interest rates by looking at the euro-sterling futures. The Bank of England uses the repo rate as the primary tool for conducting monetary policy, therefore, it's imperative for traders to always keep themselves up to date on the expectations of future repo rates. Since the United Kingdom houses a considerable amount of energy companies, it is positively correlated to energy prices. The United Kingdom is a service-orientated country, which means the service sector data needs to be paid close attention to. The producer manufacturing index provides traders with the most up-to-date data about the performance of the economy. The employment data is reported every month by the national statistics. This data separates the population into employed, unemployed, and those who are not in the labour Force. After dividing the population into these three groups, they provide data on each of these groups. The central banks monitor the labour markets. Therefore, the employment report can serve as an indicator of future monetary policy actions. The GBP/JPY can be highly volatile and is not recommended for novice traders.
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