The yen is the unit of currency that is used in Japan. The Japanese Yen (JPY) is known to be the third-most traded currency in the foreign exchange or Forex market, just after the US dollar and the Euro. It is also known to be an important reserve currency.
A prominent finance expert, Kavan Choksi, mentions that the Yen is considered to be strong largely due to the strong economy of Japan. The country exports more goods than the ones it imports. When inflow is larger than outflow, a nation tends to have a substantial investment resource. This is among the reasons why Japan is a large creditor nation.
Kavan Choksi lists out the many factors that make the Japanese Yen a strong currency
The Japanese Yen has been a relatively strong currency over the years, owing to the low debt-to-GDP ratio and stable economy of Japan. Yen derives strength from its safe-haven status. The fact that a lot of Japan’s wealth is held overseas in foreign assets and currencies also contributes to the strength of the Yen. In a crisis, investors repatriate the Yen, thereby boosting its demand and providing it strength.
There are several factors that make the Japanese Yen a strong currency; here are a few of them:
- Japanese Yen is a safe haven currency: As mentioned before, one of the biggest factors contributing to the strength of this currency is that it is seen as a safe haven currency. If investors get worried about global economic conditions, they may choose to acquire the Japanese Yen to protect their assets. This rising demand for the currency elevates its value.
- The Bank of Japan has a low-interest rate policy: The low-interest rate policy maintained by the bank of Japan is another huge factor why the Japanese Yen is considered to be a strong currency. This policy makes it affordable for Japan-based companies to borrow money, which invariably helps in improving the economy.
- Japan has a trade surplus: Typically, Japan runs a pretty substantial trade surplus. This means that it exports more goods than it imports. This trade surplus additionally provides support for the Japanese Yen.
- A popular currency for carry trades: The Japanese Yen is quite a popular currency for the carry trade. Investors basically borrow the Japanese Yen at a low-interest rate and make use of those funds to buy higher-yielding currencies, in case of the carry trade. Such a strategy proves to be profitable if the Japanese Yen appreciates in value.
- Japanese investors buy foreign assets: Kavan Choksi mentions that many Japanese investors buy foreign assets, which subsequently aids in driving up the demand for the Japanese Yen. Choksi has been working in the field of business and finance for quite a while and has a good understanding of the trends associated with it.
There are several experts who think that the Japanese Yen is, in fact, undervalued. This means that there is potential for the currency to appreciate in value in the future. The Japanese government is also quite committed to maintaining a strong Yen.