The Japanese yen, traditionally one of the world's premier safe-haven currencies, typically strengthens during periods of market turmoil. However, its performance has been notably poor in the face of escalating conflict involving the US, Israel, and Iran. Historically, Japan's sustained large trade surpluses and substantial net international investment position bolstered the yen's status as a top refuge for investors during foreign exchange market instability. Today, the yen's safe-haven characteristics appear to have become more conditional.
Joey Chew, Head of Asian FX Research at HSBC, noted, "The yen may be more vulnerable to potential oil supply shocks. For instance, in mid-June last year, the yen weakened amid heightened tensions between Israel and Iran." The fundamental backdrop for the yen has changed substantially. Factors include China and other nations capturing market share from Japanese exporters, increased energy imports to offset supply losses since the Fukushima nuclear plant shutdowns, and the diminished reliability of interest rates as an anchor.
Currently, the yen is hovering below 160 against the US dollar, its weakest level since the Japanese government intervened to support the currency in July 2024. Markets remain highly alert to the possibility of further intervention. Steve Englander, Global Head of G10 FX Research at Standard Chartered, stated the yen is "highly sensitive to oil price movements" and warned it "could easily break through the 160 level if a new oil crisis erupts."
Thomas Mathews, Head of Asia-Pacific Markets at Capital Economics in Wellington, advised, "Investors should not expect the yen to reclaim its role as a safe-haven currency in the current crisis." However, he added, "This does not mean its safe-haven status is gone completely and permanently." Carol Kong, Currency Strategist at Commonwealth Bank of Australia in Sydney, suggested that a prolonged conflict would increasingly harm global growth prospects. She believes these conditions could support a gradual recovery for the yen.
The specter of stagflation, reminiscent of the 1970s when oil prices tripled after the Yom Kippur War and Japan's inflation soared to 24.9%, is resurfacing in investors' minds. The relationship between oil prices and the yen, however, has been unstable, oscillating between positive and negative correlation since the COVID-19 pandemic.
The predictive power of the interest rate differential between US and Japanese 10-year government bonds has also waned. Debate continues over whether government spending under the Sanae Takaichi-led administration or changes to the Bank of Japan's balance sheet is the primary driver of the yen's movement.
Speculators are testing the resolve of authorities. The latest weekly data from the US Commodity Futures Trading Commission (CFTC) shows increasing net short yen positions held by leveraged funds, including hedge funds. Meanwhile, dollar-hedged yen carry trades remain surprisingly stable. Japanese investors can achieve higher returns by converting yen to dollars and investing in Japanese government bonds than in the US Treasury market. Despite previous strong demand, foreign investors withdrew the most capital from Japanese bonds in a single week since mid-January for the week ending March 7.
Comments