Forex series I: How to Trade USD vs JPY

It is rumored that the US dollar and the Japanese yen have become best friends. They both probably understood the importance of a good exchange rate and a strong bond.

Jokes aside, the USD and the JPY are among the most traded currencies in the world. Traditionally speaking, the USD is the foremost currency of the world – the sole reserve currency. 

The JPY has also played an important role historically due to the strength of the Japanese economy and the global economic footprint of Japan.

The JPY is seen as somewhat of a safe haven currency in times of volatility and crisis. We will talk more about why that may be the case.

In this article, we will also cover some basics of trading currencies, talk about the drivers of the USD and the JPY, and look at some trading strategies that you may consider deploying when trading the USD vs the JPY.

Lastly, we will mention a few lines about risk management and protecting your trading capital.

Sounds good? Let’s roll!

Forex Basics

Trading the USD vs JPY essentially means that you are trading the ratio of USD to JPY. Think of USD in the numerator and JPY in the denominator.

In forex market language, the USD is the base currency while the JPY is the quote currency. So, if the USD moves higher relative to the JPY, a long trade for USD/JPY makes money.

However, if the JPY strengthens more than the USD, then a short trade for USD/JPY makes more sense. It is all about how the USD and the JPY move relative to each other.

It could also happen that the USD goes nowhere but the JPY weakens. The USD/JPY ratio goes up in that case.

When trading forex, you have to know what a pip means. It is the unit of measurement in forex trading. One pip is 0.0001. In the case of the Japanese yen, one pip is 0.01. 

Any pair involving the JPY will have one pip equal to 0.01. Every other currency pair not involving the JPY will have one pip equal to 0.0001.

Traders will often say that their pair moved by so many pips or that they are targeting a profit of x pips.

What Moves The Japanese Yen?

The Japanese yen is the national currency of Japan. It also happens to be the third-most traded currency in the world after the USD and the EUR.

The Japanese yen is used throughout Japan, but it also has a role in the world due to the global trade of Japan with other countries. Some countries even hold the Japanese yen as a reserve currency.

One of the key value propositions offered by the yen is its stability. The Japanese economy is seen as a stable one and interest rates in the country are considered to be low. 

Japan also has a relatively neutral stance on a lot of geopolitical issues and tends not to get involved in conflicts or tensions. So, the Japanese yen has become a safe haven asset that investors flock to during times of uncertainty.

The yield curve control policy of the Japanese central bank is one of the key developments that yen traders should observe. It involves the central bank controlling the interest rates on the 10-year bonds in order to maintain stability.

There is speculation that the removal of the yield curve control might lead to a change in interest rates and a change in the value of the yen.

Other economic data like trade surplus, employment data, etc. also play an important role in driving the market sentiment towards the yen.

What’s Happening With The US Dollar?

The USD is the national currency of the US. Some would say that it is also the de facto global currency. It is the reserve currency of the world and governments around the world hold substantial amounts of the USD.

However, with recent actions by the Fed and concerns about inflation, the primacy of the USD may be on the downtrend. The dollar won’t get replaced overnight though.

As of now, it is the most important currency for traders, investors, and anyone linked to any kind of global economic activity.

The dollar is influenced by interest rates. US economic data and employment numbers are also some key drivers of the dollar.

Liquidity flows and investor sentiment towards the US economy and the dollar are major drivers of the strength of the dollar vs other currencies.

So, the policy decisions of the Fed as well as the US government are closely followed by traders.

How To Trade USD vs JPY? Some Strategies

Trading the USD vs JPY is similar to trading any major currency pair. Analyzing the price action is the first step.

Knowing about the global economy, the US economic environment and Japanese businesses is important.

Once you have done the basic groundwork, you can use some of your favorite indicators to conceptualize USD vs JPY trades.

For example, you may use a momentum oscillator like the rate of change (ROC) to check if the USD/JPY price momentum is positive or negative.

High positive ROC readings can favor long traders while high negative ROC readings can favor short trades. Rules can be made such that you stay long until the ROC value crosses below the zero line or vice versa with short trades.

Traders can also use Bollinger Bands or moving averages to identify key areas of value. Reversal trades could be initiated based on the signals generated.

Protecting Your Trading Capital

Every trade has a perceived risk and reward level. No trade is without its risk. So, there is always a chance that you may lose money in the hope of making money.

While no one can stop losses from happening, you can at least try and control them. Limit them using stop losses and by sizing your positions correctly.

A position too large may also cause a huge loss in absolute terms if things don’t go your way.

The idea of becoming a successful trader is to make more while you win and incur lower losses when you don’t win. The expected value has to be positive. Trading is a lot about probabilities rather than certainties.


We hope that you now have a better understanding of how to trade USD vs JPY. We covered some of the basics of forex, talked about the US and Japanese economies, and listed some of the drivers of the USD and JPY.

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