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The USD/JPY value is quoted in Japanese Yen for one US dollar. For instance, if this pair is seling at 150, this means that one US dollar is exchanged for 150 Japanese Yen. Since Japan is the 3rd biggest economy across the globe and a primary exporter of goods, this makes the USD/JPY one of the most regularly traded and liquid currency pairs around the world.
Kavan Choksi Japan – Factors that impact the USD/JPY currency pairing
Kavan Choksi Japan is an esteemed business expert, wealth consultant, and investor known for his invaluable knowledge of finance and economics. According to him, the currency pair USD/JPY is affected by several factors that impact the values of these two currencies. Here, their relationship with one another is impacted as well as with the other currencies across the globe. The difference in interest rates between the Bank of Japan (BoJ) and the Federal Reserve is a crucial influence on the exchange rate of the USD/JPY pairing in the global international markets.
What happens when the rates of interest are higher?
When the rates of interest are higher, the value of the currency becomes more attractive because they permit the owners of these assets that are dominated in that currency to generate higher yields. He illustrates the above with an example- if the rates of the federal funds are to rise from near zero to 2%, while the policy rate of the BoJ stays near zero, the dollar tends to become strong against the Japanese Yen because investors earn higher returns in the money markets dominated by dollars.
The Japanese Yen dropped to a 24-low against the US dollar in the middle of 2022 when the Bank of Japan refused to pursue the footsteps of the other central banks for increasing the rates of interest. The Central Bank of Japan and the government persisted in looking at deflation, which has been prevalent in the country for many years, decades to be precise. This is a more significant threat than the near-term inflation that is arising from the increase in energy prices.
The Japanese Yen is called a safe haven currency- why is that so?
The low domestic rates of interest in the middle of the nation’s deflation transformed the Yen into what is known as a “Safe Haven” currency. This means that the value of the Yen rises during times of market turmoil. During market stress, the flow of investment funds in Japan reverses, leading to the appreciation of the Yen against the US dollar. This was seen during the Great Recession, which caused the USD/JPY rates to drop from 120 in 2007 to below 90 by 2009.
Kavan Choksi Japan states that the USD/JPY currency pairing has a good correlation with the USD/CHF pairing because both of these currency pairs feature the US dollar as their base currency. The other money in the world with a conventional safe haven attraction for investors is the Swiss Franc. Investors, however, should note that the USD/JPY pairing is correlated negatively with the gold price because when the Great Recession took place, the USD/JPY pair fell, but the costs of gold soared in the market.
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