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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways The Yen is one of the world's most-traded currencies on the foreign exchange market, commonly referred to as "forex. Although Japanese domestic debt can be high, the Yen is often seen as a safe-haven investment.
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Dollar and Japanese Yen. This created a squeeze in dollars , causing the USD to go up relative to essentially all other global currencies. Once the Federal Reserve opened swap lines , global trade picked up, and more companies defaulted and began restructuring their debts, the supply and demand imbalance was no longer an issue and the dollar declined raising the value of the JPY in relative terms. This reduced hedging costs for European and Japanese investors.
If you bought USD assets, it probably made sense to keep your exposure in USD to avoid the hedging costs from whittling away expected returns. A more involved explanation of currency hedging can be found in this article. When USD Libor rates fell, hedging costs became increasingly cheaper. So, keeping hedging so low no longer made sense for non-US investors. This was a bearish pressure on the USD. Back in , , and in , the USD had the highest interest rates in developed markets. This was a positive for the dollar.
That changed in March when asset valuations fell at the fastest rate since in the US and many parts of the developed world. The dollar squeeze that occurred abated after the Fed was able to do enough to get a bottom in the stock market on March 23 through a mix of zero rates, unprecedented QE, swap lines with foreign central banks, and liquidity support programs.
At this point, the dollar supply began meeting demand. Back then, the internet was being increasingly adopted among the masses and unleashing big opportunities in a variety of ways. But the valuations were far overinflated; everything on the internet would indeed not be a smashing success and the market eventually corrected.
After that, the JPY weakened against other major currencies despite equity markets dropping into Q4 We can only look at balance of payments transactions, or net amounts. We cannot determine whether flows from Japan are local or driven by foreign investors in Japan. It can be determined, though, that the flows favor Japan toward international investments, as the years from to see increased flow.
During the to period, there have been three crises that were true global events on some level. There was tech, subprime mortgages, and a steep fall in incomes related to the coronavirus. And neither of these are particularly robust, then the status of the JPY as a safe haven may not be an appropriate story to fall back on. Stocks are the most prone to narrative-driven distortion because they are theoretically perpetual cash flow instruments. But currencies can act the same way.
And these beliefs and traditional way of going about things matter. Many managers were burned during the Covid crisis as almost all assets fell, including a lot of safe debt and gold. Reasoning that owning JPY was a good idea simply based on common habits and general beliefs is not a deeply logical rationale. And because the yen has held its safe haven status for a relatively short period — at least in relation to gold, which has been tried and true over thousands of years — it is more likely to lose this status among investors.
While some terms have commonly agreed upon definitions, e. Or can you make a correlation argument in that it has, at worst, only a slight positive correlation with risk assets. Correlations between, stocks and yen, or between anything else, are not static. It will also hold value especially well relative to an emerging market currency, and may therefore have more diversification potential in a more EM-centric asset allocation.
The JPY is also liquid. Liquidity is a positive factor for determining what can be a safe haven. But fundamental properties matter a lot. Large cap stocks are also very liquid markets, but sell-off harshly when risk-off events occur.
Japan is still an export-centric economy. They also run a large government deficit and have high debt burdens relative to GDP. This will keep real and nominal interest rates low on its assets. While Japan is a reserve currency — i. If a crisis pops up that requires the Bank of Japan to print a lot of money to fill in the gaps in incomes, spending, and lost financial wealth, they can do it. But to a lesser extent than a country like the US.
Printing money means having to sell a lot of debt. At a point, there is limited demand for this debt. So, they find that both portfolio rebalancing via JPY-based derivative transactions and self-fulfilling behaviors tend to cause appreciation in the yen. It does not truly satisfy the question of what causes yen appreciation in crises or usually , but the authors argue against the foreign investment repatriation capital inflows as the reason. A November NBER paper found that lower interest currencies perform better than higher interest currencies in economic and financial crises.
They argued that this is due to carry unwind and the risk-taking being pulled back on a general level by financial actors. The same was found by Habib and Stracca in their paper Getting beyond carry trade: What makes a safe haven currency? They found that the interest rate differential between two currencies is not a driver of safe haven status in itself. Rather, it depends on the nature of the carry trade strategies being used. The US as the dominant monetary standard was reinforced during the peak of the Covid meltdown in March The currency swap market became very illiquid because of the lack of dollars available globally.
The Fed essentially had to promise that dollars would be as available as necessary through swap lines with other central banks to get the swap market going again. The secular fundamentals of the dollar are bad, as addressed in other articles. Nobody can sustain those kinds of deficits long-term. The US will need a weaker currency. The easiest way to relieve debt burdens, if you can, is to simply create more currency. The Covid-related dollar shortages eventually washed out with trade picking back up and swap lines open so international entities could get the dollars they needed.
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