Japanese Yen JPY Investment Introduction: How to Profit from Exchange Rate Differences through Forex Trading?

Question

Japan, as a major global economy, has the Japanese Yen (JPY) as one of the most actively traded currencies in the international foreign exchange market. Whether aiming to profit from JPY carry trades or engaging in hedging operations, understanding the characteristics of the Yen and market dynamics is essential. This article will analyze the Yen market in depth to help investors grasp exchange rate trends and improve trading profitability.

Why Has the Yen Become a Favorite Among Global Investors?

The Position as the World’s Third-Largest Trading Currency

The Yen ranks third in the international forex market, behind the US dollar and euro. According to the latest trading data, the USDJPY currency pair is the second most traded currency pair globally, with high liquidity. This means that when trading JPY, the spread is usually small, and transaction costs are relatively low.

As the world’s second-largest economy, Japan’s stable trade environment and high policy transparency give the Yen the qualities of a safe-haven asset. Whenever international tensions escalate or financial markets become risky, capital tends to flow into the Yen market seeking refuge, pushing up the Yen’s value.

Arbitrage Opportunities from Low-Interest Rate Environment

Since the bubble economy in the 1990s, Japan has maintained a long-term low-interest rate policy, making the Yen one of the cheapest currencies for financing globally. This characteristic has led to classic “carry trade” strategies—borrowing Yen at low interest rates and investing in higher-yield assets to earn the interest spread. Experienced forex traders often use margin trading to participate more efficiently in the market.

The “Contagion Effect” of Asian Currencies

Historically, Yen depreciation often triggers a chain devaluation of other Asian currencies. Since many Asian economies are export-oriented, a weaker Yen makes Japanese goods more competitively priced, prompting other Asian countries to also devalue their currencies to maintain competitiveness. Therefore, observing Yen trends can help investors predict the overall direction of the Asian forex market.

The Deep Logic Behind Yen Depreciation

From Safe-Haven Stability to Active Devaluation Shift

Over the past thirty years, Yen movements have been mainly driven by the international environment—appreciating during global instability and depreciating during economic recoveries. However, since 2020, this pattern has fundamentally changed.

Global central banks have collectively launched QE (quantitative easing), with the Fed’s money-printing pace being the most aggressive. In just a few years, the global US dollar supply doubled. Amid the Fed’s easing, Japan’s central bank also implemented QE, but with less intensity, leading to a widening US-Japan interest rate differential and a significant appreciation of the US dollar against the Yen, causing the Yen to depreciate continuously.

It wasn’t until early 2024, when the Fed hinted at rate cuts, that Yen depreciation slowed. However, with Trump’s re-election as US President, market uncertainty about US policies increased, exerting new downward pressure on the Yen.

Japan’s Proactive Policy Guidance

Now, the Japanese government has shifted from passive responses to active interventions. Yen depreciation has indeed stimulated exports, with Japanese corporate profits reaching new highs, and the economy showing signs of recovery. In this context, the Japanese government may prefer to maintain or even expand Yen depreciation. Therefore, understanding Yen trends requires not only monitoring the interest rate policies of the target country (like the US) but also closely following the Bank of Japan’s stance.

USDJPY Exchange Rate Trends and Forecasts

Two Phases of Recent Trends

2015 to 2020: Despite Japan’s negative interest rate policy, the pace of QE in the US was not leading, and US interest rates were gradually declining, resulting in USD depreciation against the Yen, with USDJPY trending lower.

2021 to 2024: Japan increased QE, causing USDJPY to rise sharply. In early 2024, the Yen briefly hit a historic low of 160 Yen per USD (a 38-year low). This extreme depreciation put enormous pressure on the Japanese economy, prompting the Bank of Japan to raise interest rates in July. However, after Trump was elected US President again, the Yen faced renewed pressure, and the depreciation trend resumed.

Outlook for 2025 and Beyond

The future trend of the Yen depends on balancing multiple variables:

Depreciation pressures:

Uncertainty from Trump’s policies persists, with rising trade protectionism supporting the US dollar
Japan’s economic recovery is slow, with limited room for interest rate hikes, making the US-Japan interest rate gap difficult to narrow quickly
The Japanese government favors maintaining depreciation to stimulate exports

Appreciation supports:

Development of emerging Japanese industries could boost international capital confidence in Japan
If the Bank of Japan raises interest rates further, narrowing the interest rate gap, the Yen could appreciate
Rebalancing of the global economic landscape may bring new safe-haven demand

Overall assessment: Under the premise that the US does not intervene forcefully, the probability of a significant Yen appreciation is low, and even if it occurs, the extent will be limited. Conversely, the Yen is more likely to continue a moderate depreciation, as any market disturbance could prompt the Japanese government to expand QE to maintain competitiveness.

Comparison with Predictions from International Financial Institutions

Several well-known institutions have provided their USDJPY forecasts:

Trading Economics: Expected to reach 160.8 by the end of 2024, further rising to 162.3 in Q1 2025
Longforecast: Expecting fluctuations between 150-170 over the next three years
HSBC: Forecasts 160 by the end of June 2025, expecting the Yen’s depreciation trend to intensify
Barclays: Projecting 158 by the end of March 2025, with a continued short-term Yen depreciation trend
Morgan Stanley: Forecasting 140, believing the Yen will gradually appreciate based on US economic slowdown and Fed rate cut expectations

Although these forecasts differ in direction, most agree that the Yen is unlikely to see substantial appreciation in the medium term.

Three Major Ways to Invest in the Yen

Method 1: Bank Currency Exchange

The most traditional approach, suitable for those with travel or business needs. However, the physical buy/sell spreads are large, and from an investment perspective, significant capital is needed to achieve meaningful gains, making it less optimal.

Method 2: Yen-denominated Financial Assets

Buying Japanese stocks or Yen-denominated funds directly is a way to participate in Japan’s economic growth. Recently, Japanese stocks have performed strongly, with corporate profits reaching new highs. However, this method requires considering both exchange rate fluctuations and stock price changes, making it more suitable for experienced investors or those who prefer professional fund management.

Method 3: Forex Margin Trading for Yen Carry Trades

This is the most efficient way to participate in the Yen market. Traders track USDJPY and other Yen pairs’ exchange rate movements to profit from entry and exit spreads, without physically buying or selling Yen spot. The advantages of forex margin trading include:

Two-way trading: Long and short positions, profiting from Yen appreciation or depreciation
Leverage effect: Controlling larger positions with a fraction of the capital
High liquidity: Active USDJPY trading with tight spreads

Due to leverage and two-way trading, profits and risks are both high, requiring traders to have sufficient market knowledge and risk management skills.

Key Indicators Affecting Yen Movements

US Treasury Yields

US Treasury yields and the Yen are both safe-haven assets and tend to have a negative correlation. When US yields rise, investors prefer US bonds over Yen, reducing Yen attractiveness; the opposite is also true.

US Federal Reserve Rate Hikes or Cuts

Even if Japan begins to raise interest rates, the magnitude will be limited, while Fed policy changes are often significant. Therefore, the US-Japan interest rate differential is mainly determined by the Fed. Rate hikes by the Fed will widen the differential, weakening the Yen; rate cuts will narrow the differential, strengthening the Yen.

Trade Balance

Currency prices are ultimately determined by supply and demand. Increased global demand for Japanese products raises Yen demand, causing Yen appreciation; conversely, increased Japanese imports increase Yen supply, leading to depreciation.

Japan’s Domestic Economic Conditions

Japan’s long-term low interest rates are due to poor domestic economic performance. However, with the recent record-high Japanese stock market and significant export growth, inflationary pressures may emerge. If inflation continues to rise, the Bank of Japan might accelerate rate hikes or halt QE, potentially causing the Yen to appreciate sharply. Nonetheless, the probability of this happening is relatively low—Japan has experienced three decades of low inflation, and even if inflation occurs, the BOJ is likely to tolerate it.

Bank of Japan’s Policy Orientation

Over the past thirty years, the BOJ’s core policy has been QE. This expectation is deeply embedded in market psychology. If the BOJ unexpectedly shifts policy (e.g., stops QE), it could cause a sharp short-term impact on the exchange rate. For Yen traders, closely monitoring BOJ policy signals is crucial for short-term trading.

Practical Advice for Yen Investment

For novice investors, a gradual approach is recommended:

Beginner Stage: Start with bank currency exchange to familiarize yourself with Yen basics
Intermediate Stage: Try purchasing Japanese stock ETFs or related funds to understand the relationship between exchange rates and stock prices
Advanced Stage: After thorough learning and analysis, consider Yen forex margin trading to profit from exchange rate spreads

Forex margin trading has a low entry barrier but requires discipline, risk management skills, and market sensitivity. Before entering, conduct comprehensive analysis and fund planning to control risk exposure and achieve steady gains in the international forex market.

Frequently Asked Questions

Q: Why is the Yen considered a safe-haven currency?

A: Mainly for three reasons. First, Japan’s economy is stable, with transparent policies and predictable politics, fostering investor confidence. Second, during global financial turmoil, capital flows into Yen seeking safety. Third, Japan’s long-term low-interest-rate policy has led to continuous foreign capital inflows for arbitrage, enhancing Yen’s risk resilience.

Q: When is the best time for intraday USDJPY trading?

A: Since USDJPY is mainly driven by US investors, the highest trading volume occurs from 8 PM to 11 PM Taiwan time, when liquidity is greatest and spreads are tight, making it the best trading window.

Q: How can beginners start investing in Yen?

A: Begin with basic bank currency exchange to accumulate experience, then progress to Japanese stock ETFs or funds, and after understanding asset price fluctuations, consider participating in forex margin trading. Remember, the forex market involves both risks and rewards; thorough knowledge and risk assessment are essential before entering.