This year, the Japanese yen has experienced significant fluctuations, even reaching points of substantial weakening. However, analysts continue to regard the yen as a safe-haven asset despite these turbulent movements.
On April 29th, the yen hit its lowest level in 34 years against the US dollar, with the exchange rate touching 160 JPY per USD. This sharp decline prompted intervention from officials, which led to a subsequent recovery of the yen.
By early July, the yen once again plummeted, this time reaching a 38-year low against the USD, at 161.9 JPY per USD. This further decline forced authorities to intervene for the second time this year, spending tens of billions of USD in the process.
After the Bank of Japan (BOJ) decided to raise interest rates at the end of last month, both the Japanese stock market and the yen saw significant volatility. On August 2nd, the Nikkei 225 index experienced its sharpest drop since 1987, while the yen made a strong rebound, rising to 142 JPY per USD.
The yen has long been recognized as a shield for investors during periods of economic and political turbulence. Therefore, the frequent and substantial fluctuations of the yen this year have raised concerns about whether it can still be considered a safe-haven asset.
Speaking to CNBC, analysts maintained that the yen’s status as a safe-haven asset remains intact, largely due to the predictability of these fluctuations. We still believe the yen qualifies as a safe-haven asset because Japan is currently the world’s largest foreign creditor. They also maintain a current account surplus and have stable inflation,” said Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation. A current account deficit typically weakens a currency, while a surplus tends to increase its value.
Hugh Chung, the Investment Advisory Director at Endowus, emphasizes that the Japanese yen typically appreciates when both U.S. bond yields and stock markets decline, as seen during the 2008 financial crisis and the 2020 pandemic.
Conversely, the yen tends to weaken against the U.S. dollar when U.S. bond yields rise, even if Wall Street is in decline. A prime example is in 2022, when the U.S. Federal Reserve hiked interest rates to curb inflation.
Hugh Chung attributes this year’s sharp yen fluctuations to the significant interest rate gap between the U.S. and Japan. Currently, U.S. interest rates hover around 5.25-5.5%, the European Union at 4%, while Japan lags far behind at 0.25%.
Over the past few decades, as global central banks tightened monetary policy, Japan maintained an ultra-loose policy, making the yen an ideal target for carry trade operations. In this strategy, investors borrow in a low-interest-rate currency like the yen and sell it to buy higher-yielding currencies, with the interest rate differential pocketed as profit, often placed in savings or further investments.
This carry trade has historically weakened the yen. However, when the Bank of Japan (BOJ) raised interest rates in July, investors scrambled to “unwind carry trades,” fearing further rate hikes, which drove the yen’s value up. Currently, the exchange rate stands at 144.3 yen per U.S. dollar.
Chung asserts that the yen will remain sensitive to U.S. interest rate changes and will continue to serve as a safe-haven asset during periods of market concern about economic growth.
Ryota Abe further explains that the yen’s volatility is largely influenced by external factors rather than domestic ones. He points out that the most significant driver of this month’s fluctuation is the “excessive worry” over a potential U.S. recession, sparked by higher-than-expected unemployment data and underwhelming job growth figures.
“Of course, I wouldn’t entirely dismiss the impact of the BOJ’s surprise rate hike in July. But it was only a 15 basis point increase, and the initial market response was mixed,” Abe notes. He adds that if the BOJ’s decision had been the main catalyst, the market reaction would have been far more pronounced, with the yen appreciating even more.
The Bank of Japan announced its rate hike decision on July 31st, yet the yen only experienced significant movements during the trading sessions on August 2nd and 5th.
Abe forecasts that the yen will trade around 145 JPY per USD this year. Whether the yen strengthens further depends on how quickly the Fed reduces interest rates. By the end of next year, the yen could rise to 138 JPY, or even 130 JPY per USD. High volatility is expected, possibly influenced by the BOJ’s monetary policy decisions. However, Abe does not anticipate any short-term rate hikes from the BOJ.
On the other hand, Hugh Chung believes that the yen’s volatility has peaked this year, as some carry trade unwinding has already occurred, and the BOJ’s actions are becoming less surprising to the market.
Nonetheless, both experts agree that the yen’s future movements will largely depend on the growth outlook of the U.S. economy.
