Japan may be one of the smaller countries on the globe by land mass, but what it lacks in size it makes up for in population, economic output, and a deep history.
The Japanese have formed one of the oldest, most sustainable societies. Today, the country is the Xth largest nation on earth, and its population is among the most productive. The growth spurt began after the end of WWII, when the country refined manufacturing processes for global consumption.
Japanese Economic Stats
Japanese businesses are some of the most efficient. Invested heavily in specialized manufacturing and high-level services, Japan, and it’s capital city Tokyo, is home to a vibrant industrial base.
Main imports include raw materials, argricultural products and food, goods, and transportation products. Goods are imported from China, the United States, Saudi Arabia (oil), and Australia.
Exports include cars, electronics, machinery, steel, and specialized and accurate science equipment and luxury watches. Japan exports goods to the United States, China, South Korea, and Hong Kong. Exports to Hong Kong are primarily financial services, with Tokyo and Hong Kong both being very important financial centers.
Since Japan is relatively resource poor—most energy and raw materials are imported—Japan is involved in plenty of international trade on the importing and exporting side. Oil and raw materials come in as imports, and cars and manufactured goods leave as finished products. Japan is the world’s manufacturing king for precision products.
Japanese Monetary Policy
Japanese monetary policy decisions are governed by the Bank of Japan, which was recently made separate of the government’s Ministry of Finance. The Ministry of Finance is the equivalent of the US Treasury; the Bank of Japan is like the Federal Reserve in the United States.
The Ministry of Finance does maintain some control over international monetary policy, however. The Ministry is tasked with moderating foreign exchange transactions. Interestingly, the Ministry of Finance often chooses a target value for the Japanese Yen, but it is up to the Bank of Japan to enforce the change in the yen’s value with monetary policy decisions.
Historically, the Bank of Japan has offered some of the lowest rates on its currency. Since the 1980s bust of the Japanese economy, the nation has been declared to be in a perpetual slowdown. However, even though rates are never much higher than 0%, the economy performs well on an inflation adjusted basis. Inflation is also very low.
Historically low rates, minor deflationary presence, and relative safety of spending power makes the Japanese Yen a favorite among carry traders. Additionally, it is growing in relevance as a reserve currency, since it tends to have the lowest inflation rate, and political stability make it a safe investment.
Economic Indicators and Fundamental Releases
Japan releases several economic reports and indicators which should be watched by all forex traders:
Tankan Surveys – The Tankan Survey is the equivalent of the Purchasing Managers Index in other countries. The Tankan Surveys use 0 as the mid-point, with positive numbers indicating business confidence, and negative numbers indicating weakening confidence. Since Japan’s economy is based on financial services and industrial goods—which are sold to businesses, rather than consumers—the Japanese economy lives or dies by these surveys; as does the Yen.
Employment Rate – As with any nation, the rate of employment is very important. This number is usually directly correlated with the Tankan surveys, as the Japanese work in high-tech factories, or first-rate services industries.
Core Machinery Orders – Core machinery is that which is used to complete business processes. Examples might include factory equipment, mining products, or specialized machines designed and developed in Japanese factories. This number is split into imports and exports, which allows investors to see if a gain or slowdown is due to internal orders, or international slowdown.
Consumer Price Index – The Consumer Price Index is released by the Bank of Japan to determine the nation’s current level of inflation. Compared to other nations, where the CPI changes more quickly, the Japanese economy has settled into a very low inflation environment. There are few surprises in the CPI, but when there are surprises, you had better look out!
Balance of Trade – The name of the game for the Japanese economy is a strong exporting business. If the balance of trade shows a decline in exports, there could be future weakness in the Japanese economy. On the other hand, a slowdown in imports may foreshadow future weakness in the form of deserted factories. This is a tricky report for the Japanese economy, and forex traders should examine it in depth to find what specific areas are lagging or growing on both sides of the report—import and export.
Yen Movers and Shakers
The Yen has a few unique items that keep it in action. The Yen is, after all, the third biggest currency by volume on the foreign exchange market.
Carry trade – The Yen is cheap, especially over the long haul. With record low interest rates in play for years into the future, businesses, investors, and others can raise capital in Japan for mere basis points over zero. At that rate, a Yen in the future is essentially as cheap as a Yen today. Naturally, investors borrow Yen, convert them into another currency, and then extract the yield. Anything that affects a carry trade—economic reports, interest rates, and monetary policy decisions—will affect the Yen more than any other currency.
Oil prices – The Japanese have a very high-tech industrial base, but they don’t have direct access to oil on the island nation. The result? Almost all of their energy needs are fulfilled with oil, which must be imported from other countries. Higher oil prices greatly affect the cost of imports, and necessarily affect the balance of trade.
Active central bankers – The Bank of Japan is almost always interviening in the foreign exchange market to keep the Yen in the middle of a value the Ministry of Finance deems appropriate. This is good for carry traders and stability seekers, but should the BOJ or MoF decide to pick a higher or lower target, the Yen will move quickly in response.
