Japan is widely revered for its economic prowess and technological achievements. With one of the most advanced economies globally, its unique characteristics make Japan one of the top trading partners, exporting products to over 150 states around the globe. Furthermore, Japanese involvement is widespread within international organizations such as World Trade Organization (WTO) and Asia-Pacific Economic Cooperation (APEC).
Industries play an essential part of Japan’s economy and stand out globally when it comes to car production, electronics production and chemical synthesis; cutting-edge automation technology used for production results in superior products at very competitive prices.
However, Japan’s economy does encounter challenges. A significant one is its high dependence on exports, making it vulnerable to global economic changes. Recent years have witnessed significant issues related to labor and employment, with job cuts, reduced workforce participation rates and increasing unemployment due to rural migration to urban centers being prominent contributors. Additionally, environmental pollution issues could impact investment and hinder economic growth. Recent political changes in Japan, such as changes in government and electoral reforms, may also add to the country’s economic stability.
Japan has made strides despite these difficulties; most recently, their government implemented measures to boost growth such as investing more in infrastructure and education, improving conditions for small and midsized enterprises (SMBs) etc.
Japan invests consistently in technology and innovation, which contributes to its economic development. Unfortunately, however, increased research costs may reduce competitiveness on global markets. The economy has lately seen growth, although it has been somewhat uneven, influenced by export earnings and investments in infrastructure.
All these factors ultimately affect the exchange rate of the Japanese Yen (USD JPY). The rate carries weight with international investors and businesspeople working with Japan, having impact on the value of Japanese assets like stocks and real estate, along with the prices of Japanese goods sold abroad.
It’s worth noting that the USD JPY currency pair ranks second in terms of trading volume, following only the EUR USD, which is known for its liquidity.
Following its correction last year, 2023 has seen an upward trend in exchange rate fluctuations following further evidence of economic expansion in 2023. If growth expectations materialise further than predicted by experts then an even more substantial upswing may take place with respect to exchange rate volatility.
However, the primary factor to watch is the inflation rate. The market has frozen in anticipation, with almost all traders preparing to sell. Lingering concerns lean towards weakening, aligning with bearish sentiments.
Japan’s struggle with inflation is somewhat of a running joke. Despite being highly developed, it isn’t immune to inflation woes. Between 1985 and 2014, inflation rate in Japan lagged behind other developed countries, prompting low-interest rates and low returns on investment assets. However, starting 2020 inflation began to rise and reached unprecedented levels in 2022.
A catalyst for Japan’s inflation is low labor productivity coupled with high labor costs. To combat inflation, the Japanese government initiated various measures, including lowered import taxes and increased infrastructure spending. Structural reforms were initiated to decrease dependence on foreign investors while encouraging greater domestic investor participation.
Nevertheless, despite these efforts, inflation continues to rise. In 2022, inflation in Japan reached 4.3%, marking the highest level in 25 years. Factors also include elevated energy and commodity prices, increased spending on social welfare and healthcare.
Thus, grappling with inflation remains an ongoing challenge for Japan. The government must persist in financial system reforms, reduce reliance on external investors, enhance labor productivity, and curb labor costs.
Returning to the USD JPY rate, from a technical standpoint, concerns about a decline are well-founded. The price is approaching the historical resistance of 147.00-150.00.
Roughly speaking, this level is critical for all market participants. Its breakdown will mark a new stage in the development of the currency pair and will open the path for systematic growth.
Conversely, a downward bounce would maintain a balance between supply and demand, consolidating the price within a horizontal channel around 127.00.
So watch it closely if you see Japanese market as a great addition to your portfolio. However, do not forget that technical and fundamental analyses should go prior to any investment decisions.