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Trading the Japanese Yen

The Japanese Yen is the most widely traded Asian currency, even though the Chinese economy is now technically larger than Japan’s. Because it is not possible to trade China’s currency, the yen continues to feature high on the list of most currency traders’ shopping lists.

The yen was floated as a freely tradable currency in the foreign exchange markets in 1973.

The Bank of Japan, the country’s central bank, sets yen interest rates. Japan’s base rate has remained close to zero since 1990, making it very cheap for some currency traders to borrow in yen and invest in higher yielding assets like the New Zealand dollar (NZD), the so-called ‘carry trade’.

The yen’s share of global foreign exchange reserves has been trending downwards steadily since the early 1990s as banks diversify into other currencies. It reached a low of 2.9% of global foreign exchange reserves in 2007, and has since increased its share at the expense of the euro and the US dollar.

In the 1970s the yen depreciated to around JPY300 to the US dollar. With the growth of the Japanese economy in the 1980s, the yen soared, becoming the darling of many currency traders. In 1985 it had reached 80 to the USD.

Although the Japanese economy spectacularly crashed in 1989, the yen has continued to feature in many currency trades, and recent weakness of the euro and the USD has seen the yen return to levels not seen since the mid-1990s.

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