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JPY: a Risk or Safe Haven


16 August 2021

The Japanese Yen has been known as a Safe Haven since the 1980s. A currency is given the “Safe Haven” status due to its performance under time of uncertainty and crisis. For example, during the banking crisis in 2008, the Japanese yen hit a 13-year high of $90.87 against the USD and appreciated close to 20% towards the end of the year. In 2013, in one single day, the Yen increased 5% against the Euro due to the uncertainty surrounding the Italian elections and a possible Italian exit from the European Single Market.

Over the years safe haven currencies have not always kept their titles such as the US Dollar and the Swiss Franc. It is important to note the price movement is not certain based on the title but depends on the actions of the market participants.

Why is the Japanese Yen known as a Safe Haven?

This is something which comes down to individual perspective, as many economists have different theories on traders’ behaviour during economic uncertainty. The first argument is that Japan’s elite and market participants tend to invest in foreign markets. However, when crises hit abroad, they return their capital to the Japanese Yen, which increases the level of demand.

Others argue that Japan has little correlations with Europe and the US in terms of direct economic and banking ties. Hence, why investors prefer the Yen when the US Dollar and Euro declines. Currently the Yen is the third most used currency worldwide and Japan also has the second largest currency reserves. Again, this may also contribute to trader’s financial decisions.

Why may the Japanese Yen also carry risk?

Looking at the yen over the past two days we can see the currency is weakening against all its main competitors. Overall, the Japanese Yen Index has appreciated over the past two months due to the Delta Variant but has show indications of frailty at times. Over the past three days the index declined by over 0.70%.

As the week had little economic releases, the market mainly concentrated on the pandemic as well as political activity which may affect demand levels. Over the last 24 hours, the daily incidence in the country for the first time exceeded 15,000 cases. Due to the rising cases, the Japanese government decided to expand the restrictive measures to a further 8 out of 47 regions.

Japanese Minister of Economy Nishimura said many government officials have considered and proposed declaring a nationwide state of emergency due to the rising cases, but this has not been put in place yet. The new restrictive measures will come into force on Sunday, August 15, 2021, and will affect more than 70% of the Japanese population in one way or another, which may significantly slow down the recovery of the country’s economy.

Another risk also revolves around the low levels of inflation, and at times deflation. Japan’s consumer prices rose by 0.2% in the previous month, after a 0.1% drop in May 2021. This was the first consumer price inflation since August 2020. Between September 2020 and May this year the country actually saw deflation levels for the first time since 2016. The low levels of inflation can result in a lack of low monetary policy support for the Yen.  The Central Bank is unlikely to turn hawkish while inflation levels remain low. In addition, deflation can result in lower economic activity as traders wait for better pricing.

Another issue can possibly be a change in risk appetite. If the market stabilises and uncertainty returns to normal levels, what is likely to happen to safe haven. Well, theoretically speaking they are likely to come under strain. For example, the US employment sector has remained far behind expectations which have worried some investors. However, today the NFP figure is 73,000 higher than predicted and the unemployment rate has dropped to post-pandemic low.

It is for this reason that the market continuously evaluates the market and any changes. Safe Haven Currencies have both advantages and disadvantages, but it remains vital that traders analyse and determine the correct time to enter and exit the market.

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