The economic similarities between the United States of America and Japan are numerous and substantial in nature. Both countries are financial superpowers, ranking among the global elite in many categories including GDP, imports and exports. Political relations between the United States and Japan are complex in nature, but the economic prowess exhibited by each country can be partially attributed to the financial partnership that has evolved during the post-WWII era.
As developed economies, both the U.S. and Japan feature deep, established equities markets. In the U.S., the Dow Jones Industrial Average (DJIA), Standard & Poor's 500 (S&P 500) and NASDAQ Composite (NASDAQ) stock indices are viewed as barometers of national economic health. A few of the leading equities indices in Japan are the Nikkei 225, TOPIX and JASDAQ. In contrast to the high risk offerings of emerging nations, these equities products furnish investors with a viable way of engaging the North American and Asian-Pacific markets.
The prosperity and equity market prowess of the U.S. and Japan reinforce the USD/JPY as a major forex currency pair. In fact, currency traders around the globe engage the USD/JPY on a daily basis as a speculative vehicle or financial safe-haven. According to the Bank of International Settlements' 2019 Triennial Survey, the USD/JPY is the second most frequently traded currency pairing. On a daily basis, the USD/JPY accounts for 13.2% of the total forex handle, second to only the EUR/USD (24.0%).
At its core, the economic relationship between the U.S. and Japan is based on each country's trade balance. Japan depends on the importation of raw materials and energy from the U.S. in order to fuel its industrial sector, while the U.S. imports manufactured goods from Japan in large quantities.
For decades, the U.S./Japan trade association has been fueled by Japan's near-zero interest rate policies. Since 2000, Japan has maintained a policy interest rate between 0.5% and -0.10%. The rock-bottom rates have been essential to Japanese P.M. Shinzo Abe's plan of "Abenomics" and promoted the flow of competitive Japanese exports to the American consumer market. However, the signing of the October 2019 U.S.-Japan Trade Agreement by Abe and U.S. President Donald Trump is likely to alter trade relations significantly.
As of 2017, Japan was the fourth-largest exporter to the United States (5.7% of all U.S. imports), and the fourth-largest importer from the United States (4.1% of all U.S. exports). The interdependence of the two economies, with relationship to the import/export sectors, emphasize the necessity of exchange rate stability for each nation to maximise prosperity. The bodies tasked with maintaining the USD and JPY real-time pricing stabilities are the U.S. Federal Reserve (Fed) and Bank of Japan (BoJ).
During monetary policy changes from the Fed and BoJ, USD/JPY exchange rates typically fluctuate dramatically. This phenomenon was illustrated as BoJ and Fed monetary policies shifted throughout 2001-2006 and 2009-2013. Both periods presented vast uncertainty to the economies of each country: 2001-2006 was a challenging period for Japan, and the 2009-2013 downturn in the U.S. housing market threw a shadow across the entire U.S. economy. Among the key events were extreme commodity market volatility, as evidenced by crude oil prices upwards of US$100 per barrel.
Ultimately, each country took a similar path in dealing with their financial crises. The chosen course of action was an implementation of monetary policy centered on quantitative easing (QE) practices.
COVID-19 And Quantitative Easing (QE)
Modern history has given us several examples of how QE programs can impact the USD/JPY. QE programs from the Fed and BoJ have instituted lower interest rates and extensive lending programs to foster liquidity and increase the domestic money supply. Subsequently, as vast amounts of capital are injected into the Japanese and American economies, the USD/JPY's price action becomes exaggerated. Illustrations of QE may be found during the early 2000s, the financial crisis of 2008. and the novel coronavirus (COVID-19) pandemic of 2020.
The impact of the QE programs upon USD/JPY was obvious. As one country injected vast amounts of capital into their domestic money supply, the exchange rate became greatly exaggerated. In January 2002, during the height of Japanese QE, USD/JPY rose to levels not seen since the mid-1990s (with a high of 135.160). Conversely, in January 2012, during QE2 in the US, the USD/JPY fell to nearly unprecedented levels with a low of 76.159.
Nonetheless, the volatility of both periods pale in comparison to 2020's COVID-19 forex panic. From 1 January 2020 to 2 October 2020, the USD/JPY traded within a range of 112.22 and 101.18. Although price action consistently gravitated toward 2020's mean value, the wide range signalled intense volatility. For active practitioners of technical analysis, the chaotic market conditions proved beneficial.
Overall, the creation of money by each country's central bank had a monumental effect upon the valuation of the pairing of USD/JPY. Domestic monetary policy decisions had a great influence on the trade balance of each nation and illustrated the depth of the trade partnership between Japan and the United States.
Past Performance: Past Performance is not an indicator of future results.
USD/JPY: Key Facts
U.S. Dollar (USD)
- Currency overview: The USD is the official currency of the United States and its inhabited territories. The USD is a decimalised currency, as one dollar consists of 100 sub units called "cents." The USD acts as the world's reserve currency, with 62% of global foreign exchange reserves held by central banks being denominated in USD.
- Currency code: USD
- Central bank: United States Federal Reserve
- History: The Coinage Act of 1792 put into place the United States' first organised monetary system. Paper banknotes (dollars) were introduced into circulation in the mid-1800s, via creation of the U.S. Treasury by Congress. The Federal Reserve act of 1913 created the central bank of the US, the Federal Reserve. Through the introduction of the Bretton Woods monetary system in 1944, the USD became the world's reserve currency.
- Economy: The United States economy is considered to be a "mixed" economy, with both private industry and governmental intervention contributing to the overall economic output. The U.S. accounts for nearly 25% of global GDP annually.
- Currency subunits: 1 USD consists of 100 cents
- Denominations: Bills: $1, $2, $5, $20, $50, $100; Coins: 1c, 5c, 10c, 25c, 50c, $1
- Sixty-six countries peg the value of their currency to the USD, or directly use the USD as their national currency.
- Four currency pairings including the USD are referred to as "majors." USD/JPY, GBP/USD, USD/CHF, and EUR/USD.
Japanese Yen (JPY)
- Currency overview: The Japanese yen is the most frequently traded currency in Asia, and trades with the third-highest volume globally. Yen valued at nearly US$1 trillion is currently in global circulation. This valuation ties the yen with the USD for second globally, behind the euro.
- Currency code: JPY
- Central bank: Bank of Japan
- History: The creation of the yen is credited to the Meiji Restoration period, dating back to the mid-19th century. The New Currency Act of 1871 centralised and created a uniform monetary system in Japan, similar to the European currency structures of the day. In 1882, the Bank of Japan was created. It became the Japanese central bank, and consolidated the 153 national banks of Japan. In 1949, as a result of WWII, the yen was pegged to the dollar on a 1:1 basis according to the new Bretton Woods monetary system. This exchange rate remained in place until 1971.
- Economy: The Japanese economy is largely export driven, thus the governmental practice of periodically devaluing the yen to favour the export sector has been prevalent in Japan dating back to the early 1990s. When measured in terms of GDP purchasing power parity (PPP), Japan ranks as the fourth largest economy in the world.
- Currency subunits: No subunits of yen exist.
- Denominations: Banknotes: ¥1000, ¥2000, ¥5000, ¥10000; Coins: ¥1, ¥5, ¥10, ¥50, ¥100, ¥500.
- The Japanese yen is the national currency of Japan, with no other countries exclusively pegging to or directly using the yen as their domestic currency.
- Currency pairings commonly associated with the yen are EUR/JPY and JPY/AUD. The yen is considered a "major" when paired with the USD (USD/JPY).
This article was last updated on 5th November 2020.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…