Some forex traders may take an interest in the Japanese yen for a number of reasons. Fortunately, they will have many opportunities for investment, as the yen trades against many different currencies, including the U.S. dollar, British pound and euro. For those looking at the yen, taking the time to perform due diligence on the Japanese economy can be quite helpful.
While investors can use countless economic indicators to evaluate Japan's economy, having a short list of frequently used measures can make the task a bit easier. In addition, having an understanding of the nation's economic state may make it simpler for traders to truly grasp what is going on in Japan.
Japan's Economic State
Japan had been suffering tepid growth since the 2008 financial crisis, and Shinzo Abe became the prime minister of the nation in 2012 amid pledges to improve economic conditions. His touted plans for reform included three components: monetary easing, fiscal stimulus and reducing regulation.
However, the expansion remained lukewarm even after Abe imposed his reforms, which earned the nickname "Abenomics." More specifically, the nation's gross domestic product expanded an average of 0.8% between the fourth quarter of 2012 and the third quarter of 2015. As a result, the economy grew 2.2% during that time. In addition, the Bank of Japan (BOJ) decided in December 2015 to cut its growth forecast for the year ending March 2016 from 1.7% to 1.2%.
The nation also struggled in terms of pushing inflation to the desired level, as the core consumer price index experienced a 0.1% year-over-year increase in November 2015, the first upward movement in five months. This modest gain lagged the 2% inflation goal set by the BOJ.
Sources Of Information
Once investors have this basic understanding of Japan's economic state, they can benefit from learning more about the different sources of information. Here are several of those sources:
The Cabinet Office
The Cabinet Office of the Japanese government provides many different reports, including estimates of GDP and surveys on business conditions and capital expenditures. Additionally, the Cabinet Office has four Important Councils responsible for tasks including gathering information and advising the Prime Minister on policy matters.
Ministry of Economy Trade & Industry
The Ministry of Economy Trade & Industry is responsible for many different policy areas and also releases reports on a wide range of economic activities. Traders interested in conducting in-depth due diligence on economic conditions in the nation can go to the website of this ministry to obtain information on Industrial Production, the Current Survey of Commerce and indices that provide transparency into tertiary industries such as real estate, wholesale trade and retail trade.
The Organisation for Economic Co-operation and Development
By accessing the resources of the OECD, investors can obtain a wealth of information on Japan, including figures such as its total population, GDP and unemployment rate. The organisation also provides more in-depth measures such as government debt as a percentage of GDP, household debt as a share of disposable income and comprehensive information on household disposable income.
Traders can turn to the World Bank for data, as this international financial institution offers information different from that provided by organisations such as the OECD. By going through the World Bank, which works to help alleviate global poverty, investors can access data on life expectancy and gross national income per capita.
Top Economic Indicators
Once an investor becomes familiar with Japan's economic situation and learns more about the sources they can use to gather information on the country, they can harness these resources to start looking into the nation's most helpful economic indicators.
GDP is the benchmark yardstick used for measuring the strength of an economy, and investors can use it to get a quick sense of whether a nation's output is growing or deteriorating. Japan had the world's third-largest economy in 2014.
GDP is defined as the final market value of all goods and services created by residents. To calculate this benchmark measure of economic output, analysts can add consumption, investment, government expenditures and net exports.
Traders should be aware of a few important considerations if they harness GDP when evaluating the strength of a nation. For starters, there is both nominal GDP and real GDP. Nominal GDP has not been adjusted for inflation, while real GDP has been altered to consider such increases in the price level. In economies where inflation is positive and not negative, real GDP should be lower than nominal GDP.
Investors interested in comparing the size of a nation's economy between two different times may benefit from doing so with real GDP, as this figure considers how the price level changes over time.
GDP Per Capita
Traders can use GDP per capita to obtain a better sense of the standard of living that Japan's residents are enjoying. More importantly, they may use this measure to obtain a stronger idea of how much disposable income these residents have. To determine GDP per capita, investors can simply take GDP and divide it by the country's population.
Inflation is a key economic indicator investors can use when evaluating both Japan's economy and its currency. To obtain official figures for these increases in the price level, traders can consult the Ministry of Internal Affairs & Communications website.
Inflation in Asia's second-largest economy was comparatively low in 2015, coming in at 0.5% or lower during most months. The nation's consumer prices experienced a year-over-year increase of 0.3% in both October and November 2015 after being flat in September of that year. These tepid gains followed even weaker increases of 0.2% in July and August 2015.
Since 2011, the nation has suffered several periods of deflation, where consumer prices actually declined. In April 2013, BOJ governor Haruhiko Kuroda made a promise to increase inflation to 2% in roughly two years. Later on, Kuroda extended the bank's time frame twice, first to mid-2016 and later to either the second half of that year or the beginning of the next.
When examining the nation's inflation patterns in the long-term, the situation looks more encouraging. While this measure fell as low as -2.52% in October 2009, it enjoyed an average of 3.12% from 1958 until 2015.
Labour Market Indicators
Investors can gather information on Japan's labour market indicators from several different organisations, including the Ministry of Internal Affairs & Communications and Eurostat.
To gather information on the nation's unemployment rate, investors can once again turn to the Ministry of Internal Affairs & Communications. This rate measures the fraction of labour force participants who are actively looking for a job. Between 1953 and 2015, this rate averaged 2.72%, with a record low of 1% in November 1968 and an all-time high of 5.6% in July 2009.
Labour Force Participation Rate:
The labour force participation rate is the percentage of a nation's working-age population taking part in the workforce, whether they currently hold a position or are looking for one. By combining this indicator with the unemployment rate, investors can get a stronger sense of Japan's labour market.
This rate reached 59.4% in November 2015, slightly lower than the average of 63.95% that existed between 1953 and 2015. At its lowest, the labour force participation rate sank to 58.5%, a level reached in December 2012. In contrast, the rate hit a peak of 74% in June 1955.
Investors thinking about trading the yen may benefit from looking into Japan's money supply, as this measure has repeatedly been credited with affecting exchange rates.
For example, if Japan's money supply expands significantly while the U.S. money supply remains static or declines, this development could cause the U.S. dollar to appreciate relative to the yen. In contrast, if Japan's money supply remains unchanged over a period while the U.S. money supply expands, this development could place downward pressure on the greenback versus the yen.
If traders want to learn more about Japan's money supply, they may consult the BOJ website, as this financial institution reports M1, M2 and M3, the measures of money supply.
To improve economic conditions, the BOJ announced a quantitative easing program in 2013, which aimed to increase the nation's monetary base from ¥138 trillion at the end of 2012 to ¥200 trillion and ¥270 trillion by the end of 2013 and 2014, respectively. The initiative aimed to bolster the money supply through bond purchases, and the BOJ hoped that this initiative would help place upward pressure on the price level while stimulating demand and helping spur higher wages.
The BOJ announced an acceleration of its QE in October 2014, stepping up its bond buying to ¥80 trillion on an annual basis. In addition, the bank revealed it would start buying longer-dated Japanese government bonds, with the average debt-based security having between seven and 10 years left until it was reached.
The financial institution also revealed plans to increase its purchases of exchange-traded funds and real estate investment trusts. Under the new program, the BOJ would buy 3 trillion worth of these financial instruments per year, about three times as much as before. In December 2015, the BOJ announced the latest tweaks to its QE, which involved minor adjustments. That month, the bank revealed it would buy bonds with an average maturity of seven to 12 years in an effort to "encourage a smoother decline in interest rates across the entire yield curve."
The financial institution also revealed plans to increase its purchases of ETFs, more specifically funds that emphasize domestic companies "proactively making investment in physical and human capital." Additionally, the BOJ announced lessened restrictions on its purchases of REITs. Investors interested in the yen may benefit from staying abreast of any BOJ policy updates, as these alterations could potentially impact the value of the yen relative to other currencies.
Another economic indicator traders may consider when evaluating the yen is the Tankan Summary, a survey conducted by the BOJ four times a year to measure business sentiment. Thousands of companies participate in the poll that can yield a reading between -100 and 100.
The report can provide in-depth information on the outlook held by individual business sectors, which can vary greatly. For example, the indices for communication firms and large service companies were 33 and 25, respectively, while the index for large manufacturers was 12.
The Cabinet Office provides figures on Japan's consumer confidence. To gather the needed information, the Cabinet Office polls roughly 4,700 households containing at least two people and asks them how strong they believe business conditions will be over the next six months.
By participating in the survey, respondents answer questions involving income growth, consumers' impression of broader livelihood, employment and readiness to purchase durable goods. An index is created for each of these four areas, and the Consumer Confidence Index represents the simple average of these consumer perception indexes.
Investors may benefit from exploring this barometer of sentiment, as household final consumption expenditure accounted for 60.3%, 60.7% and 61.1% in 2011, 2012 and 2013. These traders may benefit from knowing that the nation's consumer confidence rose to 42.6 in November 2015 from 41.5 the prior month. Sentiment has not always been strong, as it fell to an all-time low of 27.4 in January 2009. The measure has been stronger over the last 30 or so years, however, averaging 42.15 between 1982 and 2015.
Industrial production figures provided by the Ministry of Economy Trade & Industry grant insight into how much output companies that belong to Japan's industrial sector are producing. This includes sectors such as mining, manufacturing and utilities.
According to these figures, industrial production averaged 1.43% growth between 1979 and 2015. During this time, the measure hit record lows and highs of -38.6% and 33.1% in February 2009 and February 2010, respectively. Industrial production then enjoyed a 1.6% year-over-year increase in November 2015, which represented the first gain in four months.
By exploring these leading economic indicators, investors can effectively research Japan's economy and potentially obtain the information they need to make better-informed trades involving the yen.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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…