USD/JPY: the interest-rate-differential pair

USD/JPY reflects interest rate differentials more plainly than any other
major pair. Trading it without watching US Treasury
yields means ignoring the most important variable there is.

1. Two mechanics to get right first

• 1 pip = 0.01, not 0.0001. Applying the wrong rule puts every risk calculation out
  by a factor of 100.
• Pip value = 1,000 ÷ the current rate.
  Around 150, that is roughly $6.70 per pip on one lot — and it shifts with the rate, unlike EUR/USD’s
  fixed $10.

2. The dominant driver: the yield gap

Japan has held rates very low for a long time while the US has moved sharply through the cycle. The
result is that USD/JPY tracks the US 10-year Treasury yield, and the US–Japan yield
gap, almost in parallel.

A practical application: keep a US yield chart open alongside. When the two
diverge, one of them usually corrects.

3. The yen’s haven behaviour

The yen is a haven asset. When markets turn risk-averse,
capital flows into the yen and USD/JPY falls — even with no Japan-related news at all.

That produces two distinct regimes:

• Normal markets — the pair follows the yield gap.
• Stressed markets — haven demand overwhelms it and the pair falls regardless of
  yields.

4. Swap: the most important cost point

Because the rate differential is large, swap on this pair is heavily one-sided:

• Long positions usually receive positive swap.
• Short positions usually pay a fairly heavy negative swap.

The consequence: holding a short for weeks is genuinely expensive. One lot at −$11 a night, held 20
days (including three triple-charged Wednesdays), costs about $286 — while the spread
costs around $7.

And the reverse is worth saying too: positive swap is not a reason to hold a bad long. Receiving $8 a
night does not offset a 200-pip fall.

5. Intervention risk

When the yen weakens too quickly, the Japanese authorities can intervene directly in the
currency market. Those interventions produce very large, very
fast moves — hundreds of pips in minutes.

This is a risk specific to this pair. If you are holding a large long while the market is discussing
the possibility of intervention, reduce the position.

6. Hours

The pair is active in both the Asian session (the Japan side) and the US session (the yield side).
That makes it one of the few majors that can be traded during Asian daytime hours — a practical
advantage worth weighing.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.