The Japanese Yen (JPY) is holding onto its strength against the US dollar for its third straight day. In fact, on Thursday, during the Asian trading session, the Yen surged to an over one-week high. This movement gives testament to its reign as one of the world’s most volatile currencies. Second, it underscores its role as a safe-haven asset amid increasing global economic uncertainties.
The Yen’s recent performance has caused some to raise eyebrows as it is typically seen as a safe-haven asset during periods of instability. Typically, when the market becomes exceedingly volatile, investors can be heavily drawn towards the Japanese currency because of its innate stability. With geopolitical tensions escalating, and worries over global economic collapse still present, the stakes are high for everyone involved. As such, investors are increasingly making the Yen their safe haven of choice.
Factors Influencing the Yen’s Performance
The worth of the Japanese Yen largely depends on the healthiness of the Japanese economy. The second rarely considered factor is the monetary policy set by the Bank of Japan (BoJ). Recent developments indicate that it won’t budge an inch from its mega-loose monetary policy. This decision has led to an increasing gap between its policy stance and that of other central banks, notably the US Federal Reserve.
The differential between Japanese and US bond yields is an important determinant of the Yen’s value. As US bond yields continue to climb, the opportunity cost of holding US dollars increases. This policy move would have the direct effect of causing a significant Yen depreciation. When US yields are flat or going down, the Yen tends to strengthen. This is a natural occurrence when investors flee to quality assets in periods of economic distress.
Additionally, trader risk appetite plays a major role in determining Yen cross-rates. When there is market stress or uncertainty, investors run to the most liquid and safest currencies. This is particularly the case during times of geopolitical risk or economic recession. Thus, increased tensions such as escalating US-China trade conflicts or worries about a prolonged US government shutdown have driven safe-haven flows towards the Japanese Yen.
The Impact of Global Uncertainties
The recent increase in the Yen’s value has been due to various global circumstances that have raised investor fears. Continuing trade tensions between the US and China add to that uncertainty. As a result, investors are rushing toward the Yen as a place of safety. As these tensions mount, market actors look to currencies considered safer havens, feeding back into the Yen appreciation, strengthening the Yen.
Alongside this, escalating geopolitical risks across the Middle East, Europe and Asia have rattled investors’ nerves. Escalated hostilities only serve to upend global markets and threaten economic stability, something none of us can afford. Typically, this means that demand for safe-haven currencies, including the Yen, spikes. This trend is a further manifestation of the greater market dynamic, wherein during periods of uncertainty the investor class flees to security instead of higher returns.
Worries about an imminent extended US government shutdown have played their part as well, boosting the Yen. In other words, investors start to worry that political gridlock will take the economy hostage at which point they want to flee the uncertainty for less risky assets. The Japanese Yen has a well-earned reputation as a safe-haven during times of crisis. As a result, it is growing into a popular and cost-effective risk mitigation alternative.
The Role of Bank of Japan’s Policy
The value of the Yen is profoundly influenced by the Bank of Japan. It accomplishes this through sound monetary policy decisions. Global central banks have responded with increasingly hawkish policy stances to fight inflationary pressures. The Bank of Japan (BoJ) sticks to its guns when it comes to ultra-loose monetary policies. This approach has produced a substantial policy gap between Japan and other large economies.
The implication of the BoJ’s accommodative stance combined with this actively negative rate environment is distinct. Instead, the Yen’s value is pushed up by safe-haven flows as well as speculative trades betting on the future effects of policy changes. Analysts have pointed to the Bank of Japan as one to watch for a possible shift in tone. Such moves would immediately affect the Yen’s exchange rate.
Japan’s economy is still shaking off the effects of COVID-related dislocations. At the same time, investors are closely watching to see how these changes may affect future monetary policy. If the BoJ indicates that it is starting to unwind its ultra-loose orientation, demand for the Yen could jump. This is most the case if other central banks do not stop raising interest rates.