Basic Fundamentals

What Market Fundamentals Can Affect Yen Futures?

In free market economies, supply and demand is the primary enabler for price movement. Any outside forces that affect supply and demand eventually affect prices. When you are considering a trade in the yen market some of the basic fundamentals that you should consider are:

1. Central Bank Policy: The Bank of Japan (BOJ) is the country's central bank. It maintains a policy of keeping the yen weak against other major currencies in order to spur exports and help economic growth in Japan. If the BOJ intervenes by selling Japanese Yen the price of the Japanese Yen may drop.

2. Current Account Balance: The current account is a function of trade balance, income from abroad, and other transfers. Since the mid- 90s Japan has maintained an extremely strong current account, mainly because of the country's strong export sector. However, the surplus could disappear by 2018 if current economic trends continue, leading to a weaker yen.

3. Inflation: Inflation is the result of rising prices in an economy over time. Japan has had one of the lowest inflation rates since the mid 1990s. The low inflation rate has kept Japanese products cheap compared to products from other countries. This has added to Japan's export growth and, in turn, increased demand for the Yen.

4. Geopolitical / Economic Turmoil: The Japanese currency is considered a safe-haven currency in times of crisis. Recently, the Japanese yen has out performed the US Dollar in times of crisis.

The Kobe earthquake and tsunami caused the yen to increase as institutional investors such as life insurers repatriated funds. Reconstruction in Japan may create an inflow of money back to Japan and increase the value of the Yen. 

Carry Trade: Since the mid-90s, investors have borrowed Japanese Yen at low interest rates and invested it in other currencies at higher interest rates. In 2008, investors rushed to exit the carry trade contributing to a sharp increase in the value of the Japanese Yen.