As a result of relatively low bid-ask spreads and enticing liquidity, trading the USD/JPY is a favorite of currency traders the world over. Occasionally referred to as the Gopher or Ninja, valuations of the USD/JPY depend heavily on foreign trade. The USD/JPY pair is an abbreviated term depicting the US dollar and Japanese Yen, where the symbol for the Japanese Yen is ¥. Since the Japanese Yen is a second currency (quote currency), the pair is called an indirect currency.The currency pair indicates how many Japanese Yen (the quote currency) are needed to purchase one US Dollar (the base currency). For example, if the pair is trading at 110, it means it takes 110 Japanese Yens to buy 1 US Dollar.

Breaking Down USD/JPY

The USD/JPY is one of the world's dominant currency pairs, with a previous survey from the Bank for International Settlements unveiling that USD/JPY represented 17% of total daily volume on forex trading markets.Conceivably the most notable factor influencing the pair is the difference in interest rates set by the US Federal Reserve and the Bank of Japan.USD/JPY has traditionally been linked with the carry trade, an investment mechanism that includes speculators borrowing money at low-interest rates and purchasing higher-yielding assets in a different currency.Before the fiscal crisis of 2008, several investors would take advantage of ultra-low interest rates from the Bank of Japan to borrow massively in Yen and invest the money abroad.However, the interest rate differential among the central banks of the US and Japan has squeezed significantly considering the global economic downturn, pointing to the unwinding of the carry trade as the value of the Yen rose.

What Determines the USD/JPY Exchange Rate?

Several factors can impact the USD/JPY valuation, including:

BOJ & US FED Monetary Policies:

The Bank of Japan and the Federal Reserve controls the supply of money in the market, to keep the economy on track. A dovish policy, which is also known as expansionary policy, weakens the currency. In contrast, a hawkish monetary policy (contractionary policy) strengthens the currency.

Economic Events:

Any movement in the US and Japanese economic events determines the exchange rates. Top of the line economic events include GDP, Employment Change, Industrial Production, and Consumer Price Index. Better than forecast data increases the demand for related currency and impacts the value of either Yen or the US Dollar, causing fluctuations in the USD/JPY exchange rate.Safe Haven: Despite the weakening economic events from the Japanese economy in the 21st century, the Japanese Yen remains a safe haven currency. When investors experience fear, stress or uncertainty about the market, the Japanese Yen appreciates. This was evident during the Great Recession, where it traded from above ¥120 in 2007, to below ¥90 in 2009.

Major Economic Events:

Gross Domestic Product – the Gross domestic product is the central measure of economic growth in the region.Employment Change – The Japanese Yen is also sensitive to changes in employment, as slacks in the labor market cause a drop in Inflation rates.Consumer Price Index – Since one of the goals of the BOJ is to maintain price stability, they keep an eye on inflation indicators such as the CPI. If the annual CPI deviates from the central bank target, the BOJ could make use of its monetary policy tools to keep inflation in check.Trade Balance – The Japanese economy is massively export dependent. Falling export numbers could lead to a decline in economic activity.Tankan Surveys – These reports survey managers from a broad range of industries, questioning them on their views of the economy. The rising sentiment (scores above 0.0) indicate that Japanese businessmen expect business activity to pick up. Scores below 0.0 suggest otherwise.

USD/JPY Specifications

The USD/JPY is traded in amounts denominated in Japanese Yen. Standard lot Size: 100,000 USD Mini lot size: 10,000 USD One pip in decimals 0.01 Pip Value: $10 (varies with exchange rate)

Formula

Profit/Loss = (Bid Price – Ask Price) X Contract Size X Number of Lots / Closing Price