Despite the Japanese yen's continued weakening this year, history has shown that it can still serve as a safe haven for investors seeking shelter. The yen has outperformed the US dollar, Swiss franc, gold, US Treasury bonds, and the euro, among the most popular safe-haven assets. According to an analysis of safe-haven asset trends and implied volatility in the US stock market, the yen once again emerged as the best-performing currency during periods of extreme market tension in the lead-up to November 5th.
Although the yen has been the worst-performing G10 currency this year, traders tend to turn to the yen during periods of intense market volatility. Ales Koutny, head of international exchange rates at Vanguard, the world's second-largest fund manager based in London, believes that the yen could appreciate against the Swiss franc, "because the rhetoric around tariffs in Europe is far higher than for some friendly Asian countries."
The yen fell by 1% after Japan's ruling coalition failed to secure a majority in parliament. The potential for several weeks of political maneuvering before a new government is formed exacerbates the significant selling pressure on the yen due to the vast interest rate differentials between Japan and other major economies.
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However, investors say that the yen still has key advantages. Japan's record current account surplus of 3.02 trillion yen ($20 billion), deep liquidity in yen, and relatively low inflation all contribute to making the world's third most-traded currency an attractive store of value.
Tariff risks also favor the yen. Moreover, with the yen trading at approximately 154 yen per US dollar, near a historical low, there is greater room for appreciation in the event of significant market volatility or government intervention to support the yen.
The Bank of Japan is currently the only developed market central bank close to considering a rate hike as its next policy move. Although the Bank of Japan is expected to keep interest rates unchanged this week, the possibility of a rate hike later this year may increase if the current weakness of the yen exacerbates inflation.
On Tuesday, in Asian trading, the yen was trading at 153.26 yen per US dollar.*Safe Scorecard*
Investor concerns about other traditional safe-haven currencies have also increased the appeal of the Japanese yen. The prospect of an expanding U.S. fiscal deficit has, to some extent, weakened investor confidence in the U.S. dollar and U.S. Treasury bonds.
"If the U.S. bond market is going to be indigestible due to fiscal deficit risks, then U.S. Treasury bonds may not be the safest assets, and therefore, neither is the U.S. dollar," said Stephen Miller, a 40-year market veteran and senior consultant at GSFM, a subsidiary of Canada's CI Financial. "The yen is cheap, and the Bank of Japan is one of the few central banks that are still tightening."
Pictet Wealth Management believes that due to potential trade conflicts with the United States, the euro could potentially fall to a level equal to the U.S. dollar. The Swiss franc lacks the liquidity of the yen, and gold prices are trading near record highs, which may limit the significant rise in gold prices during market crashes.
Of course, there are differing opinions on the appeal of the yen.
Considering that the U.S. dollar accounts for 88% of all transactions in the daily $7.5 trillion foreign exchange market, it is difficult to challenge the hegemony of the U.S. dollar.
Japan's benchmark interest rate of 0.25% is still several hundred basis points lower than that of the United States, making the yen a popular funding currency in carry trades. In carry trades, investors borrow low-yielding currencies to fund the purchase of high-yielding assets elsewhere. This is one of the biggest factors contributing to the yen's weakness this year.
"The yen used to be a typical safe-haven currency, but I'm not sure if it can maintain that status," said Peter Boockvar, Chief Investment Officer at Bleakly Financial Group. "Currently, it seems to trade more with interest rate differentials."
However, from the perspective of market positions, investors' bearishness on the yen has at least eased compared to earlier this year.Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that hedge funds bought Japanese yen earlier this month, while asset management companies also remained bullish on the yen until last week. Data compiled by Bloomberg indicates that strategists also forecast that the yen will average an appreciation to 143 yen by the end of this year.
Naomi Fink, Chief Global Strategist at Nikko Asset Management, one of Tokyo's largest fund management companies, stated, "The yen remains a safe haven." She continued, "If we see a reduction in risk, I still anticipate the yen to appreciate, and the yen-financed 'carry trades' will be unwound."
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