Roger Morph 
The forex market is notorious for being extremely volatile and exchange rates can shift considerably in a matter of minutes, which is why it is so important for individuals and businesses to have some sort of a strategy that deals with fluctuating exchange rates.
This is especially true for businesses engaged in import and export activities, as they deal with foreign currencies and require FX transactions on a regular basis.
Generally, forex trading is extremely popular in several countries, with Japan being one of the most active FX markets in the world.
MetaTrader 5 is the most popular forex trading software on the market today, which allows both individuals and companies to seamlessly exchange one currency for another, without the hassle of doing so at a commercial bank, which tends to be slower and sometimes reserved for VIP clients.
To better understand why managing foreign exchange exposure is so important for Japanese companies, we must look at the yen (JPY) and its standing on the global FX market.
The Japanese Yen – Unique characteristics
The Japanese yen, or JPY, is a currency that is distinct in several ways when compared to other major currencies, such as the euro, U.S. dollar, or the British pound.
Export-driven economy
Japan is predominantly an export-driven economy, which means that a weaker yen generally benefits the economy and, particularly, the businesses engaged in exporting manufactured goods to the global markets. In this sense, JPY is uniquely linked to the performance of two of its major trading partners – the USA and China.
Japan manufactures a wide range of advanced products – from cars and semiconductors, to home appliances and industrial machinery. This makes Japan an especially important player on both the regional and global markets.
Safe-haven asset
Furthermore, the Japanese yen is also considered to be a safe-haven currency, meaning that investors flock to it during periods of high uncertainty or market stress. This is due to Japan’s large current account surplus, very low inflation, and the perception of economic and political stability.
Therefore, demand for JPY rises when conditions in other major economies become worse. Japanese companies can use this information to buy other currencies when the yen is strongest and vice versa when the yen is back to its usual performance.
Government and central bank influence
When the Japanese yen strengthens, the Japanese government tends to intervene and increase the money supply to weaken the currency and maintain the advantage of a weak JPY for export businesses.
Japan is characterized by deflation, as opposed to inflation, which is why the Bank of Japan frequently intervenes and generally employs a proactive monetary policy to maintain the competitiveness of Japanese exports.
However, recently, the Bank of Japan has switched to positive interest rates, standing at 0.50% as of this writing.
High liquidity and tight spreads
The Japanese yen is one of the most heavily-traded currencies on the global market, which means that the liquidity levels are consistently high, while spreads are typically quite tight.
This makes JPY one of the most attractive currencies for institutional traders and the most popular currency after EUR and USD.
Many foreign investors also trade the Japanese yen heavily, particularly during the Tokyo trading session, which sees the most amount of liquidity flooding to the JPY.
How Japanese Companies Manage Forex Exposure
For Japanese companies that absolutely require currency interventions to safeguard their cash reserves from unfavorable fluctuations, there are several common strategies that help them take advantage of market volatility and make sure that their funds are safe.
Financial hedging is the most common approach and involves the use of derivatives such as options and futures contracts to lock in exchange rates for future transactions. This helps stabilize cash flows and protect profit margins, especially for firms with large USD and EUR receivables.
On the other hand, natural hedging involves aligning revenues and expenses in the same currency. For instance, a company earning USD may try to source raw materials or operate facilities in USD-denominated regions to balance out forex risk.
Many Japanese companies establish in-house treasury centers that centralize FX risk management, monitor market movements, and coordinate hedging strategies globally.
