Recent economic news out of Japan was stunning in many ways and marked the first time that such high expectations were dashed in such a short period of time. According to official government data, the nation’s economy, the third-largest on earth, underwent shrinkage to the tune of about 1.2% of GDP. While that is bad news in and of itself, it’s especially dismal when one considers that economists expected GDP to grow, not decline, by that amount, 1.2%.
Now, all the theorists are making their guesses as to why the numbers went south, what might happen next, and whether 2023 will bring lasting recovery to the nation. For traders and individual investors, there are several factors regarding the situation that present one-time opportunities. First on a list of several is the strength, or lack of it, of the yen. As of Q4 2022, it takes 143 yen to purchase a single US dollar.
But along with a long-term weakening of the national currency, the Japanese economy has several other concerning components. A few, like the domestic inflation rate and balance of trade, could spell further trouble for the general economic outlook. The best way for prospective investors to get a handle on what’s happening in Asia’s most important financial universe is to review the current conditions and examine possible ways for earning a profit on the fate of the currency, domestic stocks, and more.
The Current State of Japan’s Economy
The Japanese people are not accustomed to inflation, so the recent surge has been a major point of collective worry for all working people and property owners. The latest reports of not only inflation but also economic contraction are central pieces of the fiscal puzzle. Along with those two downsides, the once-strong yen has been tumbling against its benchmark forex companion, the US dollar. Anyone who opens an account with a forex trading company could speculate on the near-term or long-term future of the foreign exchange pair, USD/JPY, which is charted as the dollar in terms of yen. A rising graph line means Japan’s currency is getting weaker and the dollar stronger, which is precisely what has been happening.
In addition, the cost of imports and higher prices for energy are abetting the inflationary pressures and leading, synergistically, to a number of fiscal ailments. Sluggish growth that was caused by a severe round of the COVID pandemic in 2020 and 2021 has never subsided. But now, instead of the virus, there are other factors bringing GDP growth to a screeching halt and, even worse, contraction. For the first time in a quarter-century, the national bank intervened and tried to prop up the yen, but the results have not been productive.
Trading Opportunities for Investors
For forex enthusiasts, the ultra-popular pair, USD/JPY, along with assets that are closely tied to it, offer opportunities for potential profit. Individuals who prefer to work with an online broker who offers FX services can use the latest news out of Tokyo to estimate how the pair will behave for the next several months. You can use a journal to track activity in your trades if you wish to have a record of all your movements.
It’s instructive to view the big picture first, noting that the yen’s strength has only recently become unstable. Between late 2017 and mid-2021, the exchange rate hovered within a relatively normal range from 103 to 115 (yen-per-dollar). But after October of 2021, the dollar began a rapid rise in comparative value, hitting its strongest point just a few months ago at 148. While there have been a few pullbacks and retracements, the overall picture is of a stronger US dollar. Buying USD/JPY means the trader assumes that the USD will become stronger. However, the short-term outlook, based on multiple factors, is that the yen’s strength will pick up a bit during the last two months of 2022 and then weaken again during Q1 2023. If Tokyo intervenes again at that point, which is anyone’s guess, there could be yet another short round of strengthening.
CFDs (Contracts for Difference)
Especially after witnessing the FTX collapse, traders who don’t want to deal directly with the forex markets can take a step back and use CFDs instead. That’s one way of getting the chance to speculate on USD/JPY, or any other major forex pair, without owning any assets. CFDs are uniquely structured to give investors easy entry and exit to the markets of their choice. One advantage in terms of Japan’s woes is that CFDs let account holders purchase dollars when they believe the pair is rising and sell them when there is a short-term reversal in the works. Many people prefer to use contracts for difference because the trading scenarios are much simpler, and there’s no concern about how much leverage or margin to use.