Yen Cross Rates

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The Japanese Yen, despite belonging to the third most important single economy, has a much smaller international presence than the Dollar or the Euro. The Yen is characterized by being a relatively liquid currency 24 hours.

Since much of the Eastern economy moves according to Japan, the Yen is quite sensitive to factors related to Asian stock exchanges. Because of the interest rate differential between this currency and other major currencies that preponderated for several years, it is also sensitive to any change affecting the so-called “Carry Trade“, a strategy which involves buying or lending a currency with a high interest rate and selling or borrowing a currency with a low interest rate. Investors were then shifting capital away from Japan in order to earn higher yields.

However, in times of financial crisis when risk tolerance increases, the Yen is not used to fund carry trades and is punished accordingly. When volatility surges to dangerous levels, investors try to mitigate risk and are expected to park their money in the least risky capital markets. That means those in the US and Japan.

Japan is one of the world’s largest exporters, which has resulted in a consistent trade surplus. A surplus occurs when a country’s exports exceed its imports, therefore an inherent demand for Japanese Yen derives from that surplus situation. Japan is also a large importer and consumer of raw materials such as oil.

Despite the Bank of Japan avoided raising interest rates to prevent capital flows from increasing for a prolonged period, the Yen had a tendency to appreciate. This happened because of trade flows. Remember, a positive balance of trade indicates that capital is entering the economy at a more rapid rate than it is leaving, hence the value of the nation’s currency should rise.

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