Is the yen still a safe haven?

The Japanese yen has long been considered the best currency in which to invest when the world is facing danger or financial markets are in turmoil.

On more than a dozen occasions since the mid-1990s, it has soared in response to shocks, including the global financial crisis in 2008 and Britain’s vote to leave the European Union in 2016. The yen even rose in value following the Great Eastern Japanese Earthquake in 2011.

The yen is currently strong, despite the risk of a conflict involving North Korea. This puzzles Leo Lewis of the Financial Times, who asked this week why the yen is still regarded a safe haven, even though a war with North Korea could cost millions of Japanese lives and devastate its economy.

Fortunately, the risk of an all-out war is not perceived as a high – at least not for the time being. Also, as Leo Lewis points out, some foreign investors are hedging their bets and have moved their money into other safe havens, such as the Swiss Franc.

Japan and Switzerland do different types of banking. While Switzerland focuses on wealthy individuals, Japan lends money to governments, including the United States. Japan and China each hold more than a trillion dollars’ worth of US Treasury bonds.

Currency investors focus on the critical role played by Japan at the centre of the global financial system. In the words of Martin Schultz, an economist at Fujitsu Research Institute in Tokyo: “Japan is a banker to the world and when risk rises, investors look for a safe bank.” Therefore, at times of risk, Japanese companies, insurers and investors move money home from abroad, driving up the yen. Foreign investors follow their lead.

In that light, the strong yen could be regarded as a vote of confidence in Japan’s benign economic environment, despite problems with sluggish GDP growth an ageing population. However, the strong yen creates a problem for Japan’s exporters because the money they earn abroad is worth less when it is repatriated. Companies such as Toyota cope well with currency fluctuations but would prefer a weaker yen.

The yen is most likely to stabilise when negative interest rates are abolished, Japan’s economy grows and the risk of war with North Korea recedes. Such a happy situation would bring relief not just to currency traders but to all the citizens of Japan.

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