Trading FX currencies can be incredibly profitable but depending on your trading experience the profitability of your trading might improve with proper market analysis. Fundamental analysis simply means to use macroeconomic indicators like inflation, interest rates, GDP, geopolitical events, and similar to determine their potential impact on certain FX pairs like JPY. Japanese yen is a major currency, meaning that it accounts for almost 30% of retail FX trading volume. Knowing which fundamental indicators to monitor and how to interpret their readings will determine your trading outcome. Let’s explain all of that and more below in more detail.

Bank of Japan (BOJ) monetary policies

When discussing JPY trading, BOJ is one of the key players in the fundamental trading method as it defines monetary policies that directly and profoundly affect JPY’s strength against other currencies. Traders use BOJ data to measure the potential direction of JPY and then use advanced trading platforms to enrich their fundamental bias with technical analysis. This is where you need to consider advanced trading platforms that offer all the needed features to detect support and resistance zones and select suitable order types. MetaTrader 5 (MT5) is one such platform that is widely popular among retail Japanese Forex traders. MT5 offers built-in indicators and an economic calendar which is useful for monitoring macroeconomic indicators as well as technical indicators.

The BOJ’s stance on interest rates, quantitative easing, and inflation directly decides the strength of the JPY. Here is what you need to monitor about the Bank of Japan:

• Interest rate decision announcements
• Statements and interviews from BOJ officials
• Updates on inflation

Japanese interest rates were historically one of the lowest in the world which boosted the companies that were selling products overseas as high inflation rates ensured Japanese products were competitively priced. This trend started to slow down as BOJ started to raise rates lately which strengthened the JPY. The most popular pair is USDJPY and when JPY is strong it tends to go down, meaning less JPY is required to buy 1 USD. When inflation is lower the JPY strengthens and the USDJPY goes down.

Trade balance and current account

Trade balance reflects the difference between the country’s exports and imports and the current account is broader and offers a view of international trade flows. Japan is an export-driven economy and these indicators are especially important in Japan’s case. Here are the most important points to monitor in the trade balance:

• Monthly trade balance reports
• Current accounts surplus or deficit data

A trade surplus strengthens the JPY because it reflects higher demand for Japan-made goods while a deficit might weaken the currency.

Global risk sentiment

The Japanese yen is traditionally considered a safe-haven currency meaning Forex traders try to buy JPY when the USD weakens to protect their portfolio. Because of this, when there is global geopolitical uncertainty the demand for JPY increases. Key indicators for risk sentiment include stock market volatility, geopolitical tensions, and crises. When there are heightened risks in global markets JPY tends to strengthen and vice versa.

GDP growth

GDP (Gross Domestic Product) is a measure of the overall economic health of a country. It influences both investors’ and BOJ’s decisions, making it an important indicator for retail JPY traders. There are two important reports for GDP including quarterly releases and revisions to GDP growth forecasts. Naturally, a strong GDP growth supports JPY and makes it appreciate while slow GDP growth is bearish for JPY.

Employment data

Employment data is another critical indicator when analyzing JPY using the fundamental analysis method. Japan’s employment data like the unemployment rate and job-to-application ratio directly and immensely affects JPY rates against all other currencies. The most important employment indicators to monitor include the monthly unemployment rate and job-to-application ratios. Strong labor market data strengthens the JPY while weaker-than-expected employment rates are always bearish.

The bottom line

Fundamental analysis allows traders to analyze a country’s economic indicators and broader geopolitical events to forecast potential scenarios for currencies. JPY pairs are impacted by several fundamental factors such as inflation rates, BOJ’s interest rate decisions, trade balance, GDP growth rates, and employment data. By monitoring these crucial factors and analyzing their impact, JPY traders can greatly increase their trading accuracy and generate profits. By knowing how each of these factors affects the JPY, traders can detect major trend shifts in the currency and generate substantial profits.

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January 7th, 2025 by financetwitter

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