Japan’s economy has always provided a fascinating study for economists, particularly since the financial crash of 2008. Recently, the economy has grown at a faster rate than was previously forecasted, thanks largely to higher levels of capital sp...

Japan’s economy has always provided a fascinating study for economists, particularly since the financial crash of 2008. Recently, the economy has grown at a faster rate than was previously forecasted, thanks largely to higher levels of capital spending by businesses.

However, the nation’s debt-to-GDP ratio is considerably higher than any other developed economy, peaking at a staggering 249.1% back in 2016. While this number had fallen to 198.6% in December 2017, it highlights the country’s strong reliance of borrowing and consumption to maintain growth.

Billboards in Shibuya District, Tokyo, Japan

Not only this, but the Japanese economy has failed to grow at a rate of more than 2% per annum since the collapse of its equity and real estate market during the 1990s. Despite this, the Japanese Yen has continued to emerge as a safe-haven for currency investors in times of need, and in this article we’ll ask why this should be the case?

The Link Between the Japanese Economy and the Yen

The immediate takeaway here is that a currency’s performance is not solely reliant on the health of the underlying economy, even though this may sound like a counter-intuitive assertion.

So while the macroeconomic climate can impact on the value of the yen, it’s not the sole factor in influencing the minds and decisions of forex traders.

The size of the Japanese economy is another key consideration, as despite a relatively lack of growth it boasts a high level of consumer spending and a particularly technology sector. Like most major currencies, the JPY is also supported by the Central Bank of Japan, which continues to manipulate the yen as a way of fostering growth.

In this instance, the Bank of Japan has maintained a consistent strategy of minimising inflation in a bid to stimulate and economic growth simultaneously.

From an economic perspective, a low rate of inflation is known to correlate with a strong currency and a reduced exchange rate, and while Japan has flirted with deflation during the last decade this approach has definitely underpinned the strength of the yen.

Interestingly, Japan’s economy and national currency have also benefited from increased collaboration with China, which has actively increased growth and the global demand for the yen.

Of course, there have been concerns that this partnership will challenge the growth of the Japanese economy in the near-term, with declining growth in China providing considerable cause for concern. The rate of growth in China has declined by 0.4% since April 2018, for example, and this could impact the strength of the yen if it continues indefinitely.

Japan currency Yen

The Last Word

Ultimately, it’s easy to see how the JPY has emerged as a safe-haven currency for investors, with its consistent (if modest) rates of growth, low levels of inflation and strategic alliance with China.

The stability and predictability of the JPY certainly makes it one of the most profitable major currencies, particularly when it’s paired with dominant and robust currencies such as the U.S. Dollar (USD).

The USD/JPY has proved particularly lucrative of late, although the breakdown of America’s negotiations with South Korea and the nation’s continued trade war with China could see investors hedge against the USD in favour of the yen in the near-term.

The USD/JPY is likely to continue on an upward trend in the near-term, meaning that traders can leverage platforms like Oanda to capitalise on this while benefit from tight spreads.

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