What is USD/JPY 

The USD/JPY is one of the most liquid, and most frequently traded, currency pairs in the world. The Japanese Yen and US Dollar are both commonly known as “safe haven” assets.  

In fact, the two currencies together account for 66% of the world’s official foreign exchange reserves, according to data from the International Monetary Fund. This means that it can be vitally important for traders to stay on top of developments on both fronts.  

Moreover, given USD/JPY’s sensitivity to shifts in market sentiment, understanding its fundamental drivers of this influential exchange rate, and the appropriate technical strategies, may support better-informed trading decisions. However, no strategy can guarantee success, and the forex market can experience rapid and unpredictable movements. 

Key Points 

• The USD/JPY currency pair is highly liquid and frequently traded, with both the US dollar and Japanese yen commonly seen as “safe-haven” currencies, which traders focus on due to their significant role in global forex reserves and their impact on market sentiment. 

• Historical events and economic policies, including Japan’s post-war recovery, the “Lost Decade,” and the Bank of Japan’s monetary strategies, have influenced the USD/JPY’s trading dynamics and value fluctuations over time. 

• Trading USD/JPY offers opportunities due to its sensitivity to economic indicators, policy changes, and high liquidity. Traders may apply strategies for trading including technical analysis, swing trading techniques, or  economic news-based strategies, catering to a wide range of trading styles and time frames. 

The History of USD/JPY 

The Japanese Yen is the third most frequently traded currency in the world and is commonly known as an ‘anti-risk’ asset due to its stronger performance in times of increased market volatility and uncertainty.  

This comes on the back of several fundamental factors:  

Japanese investors have historically allocated more money internationally than domestically, resulting in the nation’s net foreign assets outweighing its net foreign liabilities. This might potentially lead to a surge in JPY when global market sentiment sours and ultimately results in local investors liquidating their international positions, thereby repatriating their funds back into Japanese Yen. 

Yen Adoption in 1871 by the Meiji Government 

In 1871, the yen was officially adopted by the Meiji government of Japan as the nation’s official currency. The new yen currency was based on the decimal system and replaced the previous traditional “mon” and “koban” coins issued by feudal han ^[1].  

The introduction of the yen was a step towards modernising Japan’s economy and aligning it with Western standards. Sure enough, this move encouraged foreign investment and trade with Japan.  
 
As a result, the USD/JPY currency pair started to develop as international traders and investors sought to exchange their US dollars for Japanese yen to participate in Japan’s growing economy. This early phase set the stage for the USD/JPY pair to become one of the major currency pairs in the global forex market.  

Post-War Era (World War II) 

After World War II, Japan’s economy was in ruins, and the yen underwent significant changes. In 1944, The Bretton Woods agreement created a new international monetary order with the US dollar at its centre.  
 
This established fixed exchange rates, and the yen was pegged to the US dollar at a rate of 360 yen per US dollar. This peg helped stabilise Japan’s economy and played a crucial role in its post-war recovery. 
 
This stability made it easier for businesses and investors to engage in international trade and investment with Japan. The USD/JPY pair was a key part of this stability as it provided a reliable means of exchanging US dollars for yen and vice versa. 
 
This era contributed to the development of a deep and liquid USD/JPY market. 
 

Major Historical Events — Lost Decade 

The “Lost Decade” refers to a period of economic stagnation in Japan during the 1990s and early 2000s. It was characterised by a burst real estate bubble, deflation, and sluggish economic growth. 
 
During this period, the Japanese economy, as measured by GDP, grew only 1.14% annually from 1991 to 2003 [2]. This had a profound impact on USD/JPY trading, with the yen experiencing significant fluctuations. 
 
During this time, the Bank of Japan (BOJ) implemented unconventional monetary policies, including low interest rates and quantitative easing, to combat deflation and stimulate economic growth. 
 
From 2003-2004, there was a notable period of unusual interventions taken by the BOJ in the forex market. As the Japanese yen was at risk of appreciating significantly against other major currencies, it threatened to affect Japan’s export-oriented economic model.  
 
The BOJ responded by selling over $300 billion worth of yen in the forex market over the course of the year, making it one of the biggest and most sustained interventions by a central bank in forex market history ^[3]. 
 
These policies led to periods of yen depreciation which boosted the USD/JPY pair as traders and investors sold yen and bought US dollars in anticipation of further policy measures. 

Bank of Japan’s Monetary Policy 

Japan’s central bank, the Bank of Japan, plays a pivotal role in shaping the nation’s monetary policy. 
 
The BOJ employs various tools and policies aimed at influencing key economic factors such as interest rates, inflation levels, and overall economic growth. Among its notable policies are the zero interest rate policies (ZIRP) and quantitative easing (QE) measures, specifically designed to combat deflationary pressures. 
 
The BOJ’s monetary policy decisions have had a direct impact on the USD/JPY pair. For instance, when the BOJ adopts a policy of low interest rates or engages in QE, it typically results in a weakening of the Japanese yen.  
 
A weakened yen enhances the competitiveness of Japanese exports and can stimulate economic growth. This often leads to an upward trajectory in the USD/JPY pair, as traders gravitate towards higher-yielding assets denominated in US dollars. 
 
Conversely, when the BOJ tightens its monetary policy, it tends to strengthen the yen. This shift can prompt a downward trend in the USD/JPY pair as investors seek the relative stability and higher interest rates associated with the yen. It is important to note that while central bank actions can influence currency trends, forex markets remain highly sensitive to a wide range of factors, and price movements can be rapid and unpredictable. 

Why Trade USD/JPY Currency Pair? 

The United States and Japan are two of the largest economies in the world and their currencies, the US Dollar (USD) and the Japanese Yen (JPY), often serve as key indicators of economic health and market stability. 

Trading the USD/JPY pair offers several characteristics: 

Firstly, it is highly liquid, meaning there is a large volume of trading activity, which can lead to tighter spreads and lower transaction costs compared to less liquid pairs.  

Secondly, the pair is sensitive to economic indicators and policy changes from both the US Federal Reserve and the Bank of Japan, providing ample opportunities for traders to capitalise on market volatility. While this can present trading opportunities, it also increases volatility and risk. 

Lastly, the time zone difference between the US and Japan allows for nearly 24-hour trading, offering flexibility for traders around the globe. 

Historical Trends of USD/JPY Market ^[4] 

Here is a look at the historical trends of the USD/JPY currency pair. 

2008 

The 2007–2008 financial crisis, or the Global Economic Crisis (GEC), was the most severe worldwide economic crisis since the Great Depression.  

In 2008, the USD/JPY exchange rate experienced a significant decrease. The year started with the USD valued at 109.70 JPY. However, by the end of the year, the USD had depreciated to 90.79 JPY, marking an annual decrease of 18.73%. 

2010 

The continued depreciation of the USD against the JPY in this year was believed to be indicative of the slow recovery from the financial crisis and the relative strength of the Japanese economy during this period. 

The USD started the year at 92.55 JPY and ended at 81.67 JPY, representing a decrease of 12.26%. 

2022 

Contrary to the previous years, 2022 saw a significant appreciation of the USD against the JPY. The USD started the year at 115.11 JPY and ended at 131.12 JPY, marking an increase of 13.91%.  

2025 ^[5] 

In January 2025, the Bank of Japan raised its key interest rate to 0.5% from 0.25%, making the first hike since July last year and the highest level since the 2008 global financial crisis. This decision was driven by higher wages and inflation, with the central bank noting that inflation is holding at its 2% target level. The rate hike has already had an impact on financial markets, with the Japanese Yen strengthening against the US dollar and stock prices falling. 

USD/JPY Prediction 

The yen gained 0.5% to 155.32 per dollar after the BOJ’s rate hike and inflation update, while the two-year Japanese government bond (JGB) yield hit 0.705%, its highest since October 2008.   

The USD/JPY exchange rate is projected to reach 159.994 by the end of this quarter. Looking further ahead, the exchange rate is anticipated to rise to 168.192 within one year ^[6].  

What Moves the USD/JPY Exchange Rate 

Central Banks Decision 

Central banks, notably the Bank of Japan and the Federal Reserve in the United States, wield considerable influence over the USD/JPY pair through their monetary policy decisions. These decisions encompass changes in interest rates, the implementation of quantitative easing (QE) measures, and the issuance of forward guidance.  

When a central bank adjusts interest rates, such as raising them, it can make its currency more attractive to investors seeking higher returns, potentially strengthening the currency against its counterparts. 

Economic Indicators 

Various economic indicators provide insights into the health of both the US and Japanese economies. These indicators include Gross Domestic Product (GDP), employment data, inflation rates, and consumer sentiment. 

Positive economic data in the United States, such as strong GDP growth or low unemployment, can boost the value of the US dollar, making the USD/JPY rise. 

Conversely, robust economic data in Japan can strengthen the yen and lead to a decline in USD/JPY. However, trader sentiment and broader market conditions can cause unexpected market reactions. 

“Safe-Haven” Flows 

USD/JPY is often influenced by “safe-haven” flows, especially during times of global economic uncertainty or geopolitical instability when investors often shifting their focus to the assets which are commonly seen as “safe-haven” assets.   

Historically, the US dollar and Japanese yen are considered “safe-haven” currencies, in which investors tend to buy them during turbulent times, leading to an increase in demand for both currencies. 

Therefore, when there is a surge in safe-haven demand, USD/JPY may remain relatively stable or even decline, depending on the relative strength of demand for each currency. 

Interest Rate Differences 

Interest rate differentials between the United States and Japan have a significant impact on USD/JPY. 

When the US Federal Reserve raises interest rates or signals a more hawkish monetary policy stance, it can attract foreign capital into US assets, strengthening the US dollar and potentially causing USD/JPY to rise. 

Conversely, if the Bank of Japan takes a more hawkish stance by raising interest rates, it can lead to a stronger yen and a potential decline in USD/JPY. That said, market reactions are not always linear, and multiple factors often interact. 

Trade Balances 

Trade balances between the two countries can affect USD/JPY. A trade deficit (when a country imports more than it exports) can put downward pressure on the currency. 

If the US has a trade deficit with Japan, it may lead to a weaker US dollar and, consequently, a lower USD/JPY rate. 

Conversely, if Japan has a trade deficit with the US, it can lead to yen depreciation and a potential increase in USD/JPY. 

However, the relationship between trade flows and exchange rates can be complex and influenced by broader capital flows and investor sentiment. 

USD/JPY Correlations 

Positive Correlations ^[7,8] 

U.S Treasury Yields 

The USD/JPY exchange rate shows a positive correlation with U.S. Treasury yields. When U.S. Treasury yields increase, it often leads to a strengthening of the USD, which in turn causes the USD/JPY exchange rate to rise. 

CAD/JPY 

The USD/JPY exchange rate also shows a strong positive correlation with the CAD/JPY exchange rate. This is because both pairs are influenced by similar factors, such as the strength of the U.S. dollar and global economic conditions. 

SGD/JPY 

The USD/JPY exchange rate is positively correlated with the SGD/JPY exchange rate. This is because both pairs are influenced by the strength of the US dollar. Changes in the US economy, interest rates, and market risk can simultaneously affect both pairs. 

Negative Correlations ^[9,10] 

Gold Prices 

The USD/JPY exchange rate has a negative correlation with gold prices. When gold prices rise, it often leads to a weakening of the USD, which in turn causes the USD/JPY exchange rate to fall. 

EUR/USD 

The USD/JPY exchange rate shows a negative correlation with the EUR/USD exchange rate because they share the USD as a common currency. This means that when the EUR/USD exchange rate rises, the USD/JPY exchange rate tends to fall. 

AUD/USD 

Similarly, the USD/JPY exchange rate is also a major currency pair negatively correlated with the AUD/USD exchange rate due to their common currency of USD. This means that when the AUD/USD exchange rate rises, the USD/JPY exchange rate tends to fall. 

However, please note that market reactions can vary, and past performance is not reliable indicator of the future performance.  

Trading USD/JPY Using Fundamental Analysis 

A range of underlying fundamental variables impact the risk-gauging USD/JPY exchange rate. Traders ought to be aware of them and their possible impact on the currency pair. However, traders should remain cautious when interpreting these drivers, as market behaviour can be unpredictable. 

Central Bank Monetary Policy Settings 

• A pivotal role is often played by the United States Federal Reserve and the Bank of Japan’s monetary policy settings as well as the prevailing trend in expectations for their future path. Speculation about on-coming changes in traditional and unconventional monetary policy measures can lead to heightened volatility in USD/JYP. 

Market Participant Sentiment and Risk Appetite  

• Market-wide sentiment can also have a strong impact on the USD/JPY, with periods of high volatility and uncertainty normally coinciding with JPY strengthening against USD to lead the exchange rate lower. A notable spike in the CBOE Volatility Index (VIX) – the market’s so-called “fear gauge” – usually coincides with a significant downturn in USD/JPY. 

Economic Data Points 

• Economic data can have a strong influence on USD/JPY, with Gross Domestic Product (GDP), Consumer Price Index (CPI), employment and Purchasing Managers Index (PMI) economic data releases all potentially informing forecasts for an upcoming monetary policy response from the Fed and/or the BOJ. 

US Treasury Yields  

USD/JPY rates also appear to have a relatively strong positive correlation to US 10-year Treasury yields, which might be another reflection of the pair’s sensitivity to changes in overall risk appetite. Generally, falling bond yields suggest that market participants are seeking ‘safe haven’ assets. It is perhaps not surprising then that USD/JPY and bond yields tend to chart a similar course. Of course, correlation is not causation. Nevertheless, it is probably wise to keep this relationship in mind. 

Given the high liquidity of the forex market, fundamental analysis offers valuable insights into the economic, political, and global factors driving currency movements, enabling traders to make informed decisions and manage risk effectively. 

Trading USD/JPY Using Technical Analysis 

Due to its popularity and high volume of market participation, USD/JPY is often a favoured currency pair for technical traders. The pair has been known for its adherence to major psychological chart barriers and for its tendency to move sharply away from major support and resistance levels. While technical analysis can offer insights into potential market behaviour, it should be used carefully alongside other risk management strategies, and outcomes cannot be guaranteed. 

Price Action Trading 

This method relies on analysing historical price movements and patterns on price charts to make trading decisions. Here are some key aspects of using price action trading for USD/JPY: 

Candlestick Patterns: Price action traders often focus on candlestick patterns to identify potential entry and exit points. Patterns like doji, hammer, engulfing patterns, and shooting star can provide insights into market sentiment and potential reversals. 

Support and Resistance: Identifying key support and resistance levels is essential. Traders look for areas where prices have historically stalled or reversed, which can serve as potential entry or exit points. 

Trend Analysis: Price action traders assess the overall trend by looking at patterns such as higher highs and higher lows for an uptrend and lower highs and lower lows for a downtrend. This may assist in determining the market momentum. 

Price Patterns: Traders also watch for chart patterns like head and shoulders, double tops, and triangles. These patterns can offer clues about potential price movements. 

Risk Management 

Risk management is a crucial aspect of trading the USD/JPY pair. Given the inherent volatility of the forex market, traders are exposed to potential losses that can exceed their initial investment. 

Therefore, implementing effective risk management strategies is essential.  

These strategies may include setting stop-loss and take-profit levels to limit potential losses and secure profits, respectively. Diversifying one’s portfolio to spread risk across different currency pairs and asset classes is also a common practice.  

Additionally, traders should keep abreast of economic news and indicators, as these can significantly impact the USD/JPY exchange rate. 

Strategies to Trade USD/JPY 

Trading USD/JPY requires various strategies depending on your trading style, risk tolerance, and market conditions. Knowing when to use which strategy is important. However, please note that no strategy is guaranteed to succeed, and traders should apply appropriate risk controls. 

Here are some popular forex trading strategies you can execute when trading USD/JPY. 

Swing Trading 

Swing trading is a trading strategy that focuses on capturing shorter- to medium-term price swings within financial markets. Swing traders typically hold positions for several days to weeks, aiming to profit from price fluctuations during this timeframe. They employ technical analysis tools, such as chart patterns and indicators, to identify potential entry and exit points. 

Swing trading strikes a balance between the shorter time frame of day trading and the longer-term perspective of buy-and-hold investing, making it a popular choice for traders with other commitments who seek to benefit from market volatility. 

News Trading 

News trading involves capitalising on short-term price movements in financial markets following the release of important economic or geopolitical news events. This strategy involves monitoring economic calendars for scheduled data releases (e.g., employment reports, interest rate decisions, GDP figures) and unexpected news (e.g., geopolitical developments, corporate earnings reports).  

The goal is to quickly analyse the impact of these events on asset prices and execute trades to profit from the resulting volatility. However, markets may react unpredictably as well.  

Position Trading 

Position trading is a longer-term investment strategy that involves taking positions in financial markets with the intention of holding them for an extended period, often months or even years.  

Position traders base their decisions on fundamental analysis, such as macroeconomic trends, company financials, and geopolitical factors, to identify assets with long-term growth potential. They aim to capitalise on major trends and market cycles, seeking to benefit from substantial price movements over time. 

Carry Trade 

With this carry trade, investors borrow money in a currency with a low interest rate (often referred to as the “funding currency”) and invest it in a currency with a higher interest rate (known as the “target currency”). The goal is to profit from the interest rate differential, known as the “carry,” between the two currencies. Traders earn money from the interest rate spread as long as the exchange rate remains relatively stable or moves favourably in their direction. However, exchange rate risk can reverse gains, especially during volatile or risk-off conditions. 

Price Breakout 

The price breakout strategy involves identifying key support and resistance levels on a price chart and entering a trade when the price breaks out of these levels. When the price surpasses a resistance level, traders often interpret it as a bullish signal, suggesting potential upward momentum, and they may go long (buy). Conversely, when the price breaks below a support level, traders often interpret it as a bearish signal, indicating potential downward momentum, and traders may go short (sell). While these may indicate momentum, it is important to note that false breakouts are common.  

FAQs for USD/JPY Trading via CFDs 

What are the risks of trading USD/JPY via CFDs? 

Trading USD/JPY via CFDs carries certain risks. These include: 

• Volatility: The forex market can be highly volatile, and the USD/JPY pair is no exception. Unexpected price swings can occur, leading to potential losses. 

• Margin Trading: Trading via margin magnifies both potential profits and losses. Losses may exceed your initial deposit. 

• Economic and Geopolitical Events: Big events in the U.S. and Japan can cause large price movements. 

• Interest Rate Changes: The interest rates set by the Bank of Japan (BoJ) and the Federal Reserve (Fed) can significantly influence the USD/JPY price. 

Is USD/JPY a good pair to trade? 

The USD/JPY pair is one of the major currency pairs in the forex market and is , known for its high liquidity, volatility, and low spreads. These factors may appeal to traders, though high volatility also brings higher risk. Traders should always assess whether this product and strategy align with their trading experience and financial situation. 

What are some additional tips for trading USD/JPY via CFDs? 

Here are some additional tips for when you trade the USD/JPY currency pair via CFDs: 

• Stay Informed: Keep a close eye on economic calendars and news sources. Be aware of scheduled announcements and events that may influence the currency pair. Be up to date with the latest market events and news, with the help of tools such as Vantage’s economic calendar and market news. 

• Use Technical Analysis Cautiously: Utilise technical analysis tools, such as charts and indicators, may help to identify potential entry and exit points – but no strategy guarantees outcomes. 

• Understand Market Fundamentals: Consider key events such as US GDP data, Fed interest rate decisions, BOJ borrowing decisions, or Japanese labour market data releases. 

• Be Time-Aware: The forex market is open 24/5, but the Asian trading session (Tokyo) often offers unique opportunities for trading the USD/JPY due to higher activity. 

• Implement Risk Management Strategies: Use stop-loss orders and take-profit orders to manage your risk effectively.  
   

Trade USD/JPY via CFDS with Vantage 

You can open your live trading account with Vantage to start trading USD/JPY via CFDs. Vantage also provides a free demo account, which will allow you to practice various trading strategies and techniques without having to deploy your own capital. Follow the link below to find out how you can get started! 

References