USD/JPY

The USD/JPY spot figure represents the amount in Japanese yen that can be bought with a single US dollar.

It is one of the world's major currency pairs, with a previous survey from the Bank for International Settlements revealing that USD/JPY represented 17 per cent of total daily volume on forex trading markets.

Perhaps the most significant factor affecting the pair is the difference in interest rates set by the US Federal Reserve and the Bank of Japan.

USD/JPY has traditionally been associated with the carry trade, an investment tool that involves speculators borrowing money at low interest rates and buying higher-yielding assets in a different currency.

Before the financial crisis of 2008, many investors would take advantage of ultra-low interest rates from the Bank of Japan to borrow heavily in yen and invest the money elsewhere.

Although potentially very profitable, the process also carries a high level of risk due to the volatility of exchange markets. A sudden currency move in the wrong direction will leave speculators facing big losses.

The interest rate differential between the central banks of the US and Japan has narrowed considerably since the global economic downturn, leading to the unwinding of the carry trade as the value of the yen soared.

However, several analysts hailed the return of the carry trade earlier this year after the G7 nations made a joint intervention to curb the strength of the Japanese currency.

Key factors affecting the value of the US dollar are GDP growth, inflation, interest rates and unemployment data, while the yen is also influenced by similar economic indicators.

USD/JPY Market Influences

Foreign exchange rates influence the fundamental situation of other markets. In general they reflect the strength or weakness of a particular economy. There are certain factors that directly influence forex prices. These factors generally fall into three categories: economic factors, political conditions and market psychology. Economic factors include economic policy of that particular country circulated by government agencies and central banks, economic conditions prevailing in that country and other economic indicators. The market usually reacts negatively to expanding government budget deficits, and positively to reduction in the budget deficits.