No safe havens like Japanese assets

June 28, 2016

Japanese fixed income assets and its currency are once again proving to be the best haven in turbulent times. Investors just love piling into the country’s bonds and yen, whenever there are signs of trouble and uncertainties.

Japan is truly special in many ways. There is no country in the world that has experienced prolonged deflation like the one faced by Japan for decades. There is also no country in the developed world that has a debt to GDP ratio of 230 percent but extremely low yield. There is also no central bank in the world that has seen its stimulus and intervention fail to weaken the exchange rates over and over again.

An empirical research by International Monetary Fund (IMF) shows that only two currencies, Swiss franc, and the Japanese yen have shown evidence of gains against the dollar, during a turmoil, which are selloffs in stocks and an increases in volatilities across asset classes. Yet current evidence suggest, Swiss franc has weakened post Brexit once the Swiss National Bank (SNB) intervened in the FX market. Bank of Japan (BoJ) has yet not done that but history suggests previous intervention has failed to weaken Yen, instead traders, speculators and investors used every dips as an opportunity for fresh long positions. Bank of Japan (BoJ) has only been effective in the very short run. Empirical study also suggests that there are no evidence of capital flows that back Yen’s safe haven status, which means derivative positioning and carry trades in the spot market do the magic. Yen is the best performing currency this year. It’s up more than 15 percent YTD and currently trading at 102 per dollar.

However, it is not the Japanese yen alone that has been proving to be a investor darling post Brexit. Yields on Japanese government bonds are diving down too. Japanese government bond (JGB) yields are negative up to 15 years and 40-year yield is hovering just at 0.8 percent. This is extraordinary, given the fact that 40-year bond was trading at 1.6 percent yield just a year back. In past 5 year Japanese 10 year yield has declined by 120 percent, only second to Switzerland’s, where it has declined by 131 percent. But Switzerland's economy is one-seventh the size of Japanese economy. Japan’s bond market is largest in the world after the United States.

While the financial markets, economists and analysts including us continue to debate whether these surges are bubble or not, at this point is more than fair to conclude that there are no safe havens like the Japanese ones.

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