The currency pair known as USD/JPY (United States Dollar against the Japanese Yen) is one of a select group of currency pairs called the Majors. The Majors are the most frequently traded currency pairs in the world, and are often the only currency pairs to be quoted in financial news bulletins. The other Majors are EUR/USD (Euros against US Dollars), GBP/USD (Sterling against US Dollars), AUD/USD (Australian Dollars against US Dollars), USD/CHF (US Dollars against Swiss Francs) and USD/CAD (US Dollars against Canadian Dollars). In addition, the NZD/USD (New Zealand Dollars against US Dollars) currency pair is considered by some, but not all, forex traders as being part of this group.
These currency pairs account for approximately 85% of all currency trades, and therefore exhibit high market liquidity, which means that they can be sold without significantly affecting the price of the currency. The main advantage of this high market liquidity is that the value of the currency does not fall significantly when large amounts of it are sold, which prevents large-scale traders from losing money when they do so. This is the main reason why currency speculators tend to prefer to trade only in the major currency pairs, as these tend to offer greater profit margins. As a result, the majority of retail FX brokers tend to deal exclusively in these currency pairs, as they are the only ones that offer affordable transaction costs.
When an exchange rate is quoted, it usually looks a bit like this:
EUR/USD = 1.4132
However, the USD/JPY is an exception to this rule, in that it is usually only quoted to two decimal places, like so:
USD/JPY = 78.41
The reason for this is to keep the system of percentage points (pips) consistent with the other currency pairs. A percentage point or pip is a hundredth of a percent, or 0.0001. Unlike the rest of the major currencies, which are all relatively similar to each other in value, the Japanese Yen is a lot closer to being one hundredth of the value of other major currencies. Because of this, it is considered to be a ‘cheap’ currency pair, in that you can get a buy a lot more Yen with a dollar than, for example, Euros or Pounds. Therefore, the percentage point system is adjusted to give a degree of parity with other currency pairs, so that transaction fees and spreads can be kept similar across the board.
This was not always the case. Up until the mid to late 1800s, the Yen was effectively a dollar unit, based on the Spanish ‘pieces of eight’ model, and were exchangeable on roughly a one to one basis. However, by the turn of the century, the Yen had fallen to approximately half the value of the dollar, and after the Second World War, the Yen collapsed in value. In an effort to stabilise the currency, its value was fixed at 360 to the dollar under the Bretton Woods system. However, by the 1970s, the low value of the Yen had begun to give Japan an unfair trading advantage over western nations, and was one of the main catalysts for the abolition of the Bretton Woods system in 1971.