When the Bank of Japan (BoJ) decided to adopt negative interest rates, it may or may not have anticipated the impact on the JPY and the Nikkei 225. In fact, something rather interesting happened during the time that the Bank of Japan dropped interest rates to -0.1% and the Chinese New Year; a sharp reversal in the Japanese yen took place, and the Nikkei 225 weakened dramatically.

For starters, it is now possible to trade $1 for ¥112.395. The year-to-date performance of the USD has been shoddy, with a decline of -6.59%. If we extrapolate over the course of 1 year, the dollar was trading at a high of ¥125.86. The strengthening of the yen is the result of uncertainty in Asia, notably China, and Japan’s currency being a safe haven asset. However the negative interest rate has had a marked effect on the Japanese yen. For the most part however banks in Japan do not perceive the negative interest rate as a tax – since very little percentage of total bank liquidity is levied at negative rates.

When the Bank of Japan (BoJ) decided to adopt negative interest rates, it may or may not have anticipated the impact on the JPY and the Nikkei 225. In fact, something rather interesting happened during the time that the Bank of Japan dropped interest rates to -0.1% and the Chinese New Year; a sharp reversal in the Japanese yen took place, and the Nikkei 225 weakened dramatically. For starters, it is now possible to trade $1 for ¥112.395. The year-to-date performance of the USD has been shoddy, with a decline of -6.59%. If we extrapolate over the course of 1 year, the dollar was trading at a high of ¥125.86. The strengthening of the yen is the result of uncertainty in Asia, notably China, and Japan’s currency being a safe haven asset. However the negative interest rate has had a marked effect on the Japanese yen. For the most part however banks in Japan do not perceive the negative interest rate as a tax – since very little percentage of total bank liquidity is levied at negative rates.

Overall Currency Trading lower from October 2014 – October 2015

(Click on image to enlarge)

The overall volume of currency trading in pairs like the USD/JPY has decreased over the past year. From approximately $2,800 billion per day in October, the current volume of global currency trading in North America and the United Kingdom has plunged to approximately $800 billion per day in October 2015. A big reason for this is a decrease in liquidity is the credit crunch. Recessionary fears and deflation taking root across Japan, and large parts of Europe are weighing on traders’ minds. There have been multiple crashes in emerging market currencies of late, including the Norwegian krone, the South African Rand and the New Zealand dollar. During these highly turbulent times, it appears as if liquidity is disappearing from markets, while it’s more an aversion to risk that we are witnessing. Such is the stressed nature of the financial markets that major averages including the Nigerian stock market have implemented kill switches to prevent further losses on their averages, even though China with its Shanghai Composite index and Shenzhen composite index abandoned these kill switches after it was announced that they exacerbated negative market sentiment.

(Click on image to enlarge)

After the Lunar New Year in China, Chinese steel mills resumed massive output and spurred a spike in iron ore prices to $50.30 per tonne. This briefly caused mining companies to rally, which in turn helped the world’s #2 biggest economy to enjoy a brief respite. However, when looking at the USD/JPY currency pair it should be remembered that while the dollar has declined in value in 2016, it has appreciated by over 20% since 2014. It remains the go-to currency in times of geopolitical crisis and uncertainty, and what we are seeing with Japan now is the declining performance of the Nikkei 225 owing to the strengthening of the currency. Since a strong Japanese yen means that exports from Japan will be more expensive – this causes equity prices to plunge. This can be seen in the above chart. By the same token, a strong Japanese yen means that imports are significantly cheaper for Japanese consumers. The Nikkei 225 is currently trading at 16,140.34, up 224.55 points (+1.41%), but that belies the greater long-term trend which is clearly negative. For the year-to-date, that Nikkei 225 is down over 15%.

USD Strengthens Against JPY in Past 2 Days

The Takeaway

In the medium-term it is expected that the USD and the EUR will move ever closer, with the dollar strengthening to as much as 1.05, perhaps stronger against the euro. This will invariably cause the Bank of Japan and the European Central Bank to continue with QE policies, which will in turn cause a further depreciation of currencies like the Japanese yen and euro. But as binary options traders, we are interested in the short-term and there are several important developments that have been taking place. For example the Ichimoku conversion line shows resistance at ¥112.95, and the Japanese yen is once again a ranking G-10 currency owing to fears of a Brexit and its impact on the GBP and the EUR. We also have the 30-year bond in Japan with a yield of 0.909%, which also points towards a strong Japanese yen. My opinion, and those of fellow analysts is that the JPY will likely strengthen and put options on the USD/JPY might be worth considering in the short term.