The Learn About Futures Insider : Japanese Yen

[Guest Katie Gray]

This Eastern Asian currency is one of the most widely traded currencies in the foreign exchange market, second only to the US Dollar and Euro, according to trading surveys. The official national currency of Japan, the name yen means "round object". The following contract specifications will refer to the Japanese Yen/US Dollar contract from the foreign exchange futures listings from the CME Group.

Contract Size: 12,500,000 Japanese Yen

Price Quote & Tick Size: $.000001 per Japanese yen increments ($12.50/contract). $.0000005 per Japanese yen increments ($6.25/contract) for JPY/USD futures intra-currency spreads executed on the trading floor and electronically, and for AON transactions.

Contract Months: March, June, September, December

Trading Specs: Open outcry is 7:20 a.m.-2:00 p.m. and Globex hours are Sundays: 5:00 p.m. to 4:00 p.m. Central Time (CT) next day. Monday through Friday: 5:00 p.m. to 4:00 p.m. CT the next day, except on Friday - closes at 4:00 p.m. and reopens Sunday at 5:00 p.m. CT.

Daily Price Limit: Consult exchange.

Trading Symbols: JY, 6J on Globex

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

Japanese Yen Facts

 

In the late nineteenth century, Japan embarked on a period of economic expansion. Part of this was built on a base of embracing a free market economy concept from Western contemporaries. The mid to late twentieth century was a period of large overall economic growth in Japan, but that growth slowed in the 1990s following an economic bubble. According to the IMF, Japan is the second largest economy in the world, nearing a nominal GDP of nearly $5 trillion. This data was compiled prior to the recent recessionary period as well as the natural and nuclear disasters, but the significance of the island nation on a global level is still apparent.

The following chart shows the GDP growth as a percent change from the preceding year:

Japan has enjoyed lower unemployment rates, around 4 percent, as well as some of the highest worker salaries in the world, according to the Big Mac Index. Well known companies in Japan are Toyota, Canon, Honda, Sony, Nintendo, Nipon Steel, and Mitsubishi. Banking, insurance, retail, and transportation are among the key industries in Japan and roughly three quarters of the GDP is from the service sector.

Exports are also a key component of Japan's economy, mostly of transportation equipment, motor vehicles, and electronics, and the main export markets are as follows:

United States - 22.8%

European Union - 14.5%

China - 14.3%

South Korea - 7.8%

Taiwan - 6.8%

Hong Kong - 5.6%

Imports, including mainly food, machinery, and fossil fuels, come from China (20.5%), the United States (12.0%), the European Union (10.3%), Saudi Arabia (6.4%), the United Arad Emirates (5.5%), and others.

The Japanese Yen was adopted officially in 1871 and Japan was moved onto the gold standard. After losing a significant portion of value following World War II, the yen was fixed to the US dollar. Abandonment of the Bretton Woods System - monetary management rules among major industrialized states - in 1971 eventually led to the yen being among those currencies allowed to float.

The Bank of Japan - the nation's central bank - sets monetary policies. Updates and information can be found on their official website.

Key terms for this market include:

Nichigin - the short form name of the Bank of Japan.

Asset price bubble - references an economic bubble that Japan experienced between 1986 and 1991.

Key Uses

 

Besides the obvious implications and uses for currency, the Japanese Yen has investing applications as well. As a financial instrument, Japanese Yen futures are often used as a means to hedge currency exchange risk.

Key Concerns

 

Several factors within a nation can have a significant effect on the currency exchange rates and the relative importance of each is the subject of debate, however, it is important to be aware of some of the key fundamentals. In addition to these concerns, the Japanese Yen has been the subject of government intervention when the exchange rate is perceived as detrimental to business exports, although this is not a guarantee of future intervention, especially with changes within the government. Also, Japan has frequently experienced natural disasters which can alter the economic landscape. Most recently, an earthquake and tsunami led to a nuclear crisis.

Inflation: It is generally believed that countries with consistently lower inflation exhibit a rising currency value while countries with higher inflation may see currency depreciation.

Interest Rates: Interest rates in Japan have been kept low by the central bank in an effort to spur economic growth. This low interest rate has attracted investors to borrow in Japan to invest in other countries, a practice which is known as carry trade.

Overall Economic Conditions: Everything from a country's balance of trade to the size of their deficit or surplus can serve as a barometer of the condition of the country and the likelihood of default. Investors look for countries with stronger economic foundations and the better the economic foundation of one country versus another may increase the value of the country's currency.

Perception: The so called "flight to quality" exists within foreign currencies as investors will often seek what they perceive as "safe haven" currencies during times of political or economical instability.

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