The economies of Japan and the United States are closely linked. Each nation has investments in the other country and each nation sells products to the other. Over the years Japan has traditionally been a buyer of US treasury debt. At times this has been Japan’s strategy to keep the value of the dollar high so that Japanese products will be more attractive. At times, such as now, Japan’s central bank will intervene in the currency markets and buy dollars to help stabilize exchange rates. When trading USD/JPY it is wise to be aware of this relationship and how it affects exchange rates.
Changes in the USD/JPY exchange rate ripple through all Forex trading. Traders typically watch for signs of how comfortable the Federal Reserve and Japan’s central bank are with the USD/JPY exchange rate. Having a good sense of the comfort level is relative to the current USD/JPY exchange rate will help you when the market starts to move and you need to decide whether to scalp on the way up or down or ride the trend to a big win.
Other aspects of the USD/JPY exchange rate in Forex trading are that Japan has to import virtually all of the raw materials for its industry and all of its oil. The United States, on the other hand, although it imports a lot of oil, produces most of what it needs and has immense supply of coal. The USA also has mineral resources not found in Japan. Rising oil prices hurt both countries and both currencies but the USD/JPY exchange rate tends to favor a more valuable dollar when energy prices go up.
US agriculture is the USA’s largest exporter and Japan is a major customer. Japan has a large number of small farms that are highly subsidized. Politics in Japan affect the subsidies and duties on imported food. Thus the USD/JPY exchange rate is related to the amount and price of food exported from the USA to Japan.
When Forex trading the USD/JPY currency pair it may at times be more favorable to be trading when the Japanese market is open in order to take advantage of news breaking during the Japanese news cycle which can drive the exchange rate.
As virtually all economies are working their way through and out of the recession one of the Forex trading issues with the USD/JPY currency pair is which economy will recover faster. Currently experts are predicting a slightly faster US recovery through the end of 2010. Thus the USD/JPY exchange rate should favor the dollar. However, the USA is a huge buyer of Japanese products so a more prosperous USD will increase Japan to USA exports and Japanese prosperity. Exploiting a “window of opportunity” in the next few months may be a wise Forex trading strategy for the USD/JPY currency pair.
As with all Forex trading being prepared leads to better results. If you are going to trade USD/JPY then you need to follow the exchange rate and the news and events that cause it to change.