Deepening losses in technology shares pushed investors toward traditional safe-haven assets including the yen, Japanese government bonds, and US Treasuries.
The yen extended its advance to its strongest level in more than a month. After trading in a narrow range against the dollar for several weeks, the yen broke out over the past 24 hours and is now trading at levels last seen on September 18, the day the Bank of Japan raised interest rates. On Friday, the yen rose as much as 0.4% to 156.08 per dollar, following a 0.9% gain on Thursday.
Asian equities tracked US stocks lower as investors continued rotating out of technology shares. Japan's benchmark 10-year government bond rallied, pushing its yield down 10 basis points to 2.78%, while the 20-year yield fell 6 basis points. US Treasuries largely held onto Thursday's gains. Japanese government bond yields declined across the entire curve on Friday.
Why the yen has regained its safe-haven appeal
"This week's earnings from large US technology companies raised doubts about the AI-led US growth narrative, so the yen is being favored over the dollar as a safe-haven asset," said Carol Kong, a strategist at Commonwealth Bank of Australia. She added that if the unwinding of technology stock positions intensifies, the dollar-yen pair could continue to move lower.
This shift marks a turn for the currency. In recent years, the yen has struggled to consistently benefit from its traditional safe-haven status. During periods of market stress, wide interest rate differentials and Japan's massive overseas investment flows have often outweighed demand for the yen. In addition, reports that Bank of Japan officials favor keeping rates unchanged at this month's meeting have dampened expectations for near-term tightening.
The "US character" of the latest selloff may be changing this dynamic. "Dollar selling driven by the retreat of 'US exceptionalism' is offsetting safe-haven dollar buying," said Tom Nakamura, head of fixed income and foreign exchange at AGF Investments Inc. He expects the yen could strengthen to 156 per dollar in the near term.
Bond market: bonds are behaving like bonds again
"Bonds are behaving like bonds again," said Masahiko Loo, a senior fixed income strategist at State Street Investment Management in Tokyo. "When risk assets are volatile, duration provides diversification, and investors can finally earn coupon income while they wait."
Japanese government bond yields had risen to multi-decade highs earlier this month on concerns about inflation, fiscal spending, and a global bond selloff, but have been declining since. Friday's bond rally came even as data showed Japan's key inflation gauge rose above the Bank of Japan's 2% target for the first time this year, a reading that would normally support a widely expected December rate hike.
Loo said that with the market shifting its focus to growth risks and concerns surrounding AI, inflation data has taken a back seat. "Today's sharp decline in short- and medium-term rates also suggests that the market is pricing in a possible delay in the Bank of Japan's rate hike if AI stock declines and European debt concerns trigger sustained financial market shocks," said Ryutaro Kimura, a senior bond strategist at BNP Paribas Asset Management.
Analysis suggests that as the yield curve continues to flatten, newly issued on-the-run Japanese government bonds can no longer offer a 4% yield, with demand for safe assets outweighing the impact of CPI data. He also noted that the dollar-yen pair is falling, with the 155 level now in sight.
Crosses and options
The yen's appeal is not limited to its exchange rate against the dollar. It rose 0.3% against the Swiss franc and also gained 0.3% against the euro, as French fiscal concerns and elevated energy prices weighed on the euro.
Options traders have also turned more optimistic on the yen, as reflected in one-month dollar-yen risk reversals. The shift indicates investors are increasingly positioning for short-term yen gains, even as strategists continue to debate whether the recent strength is mainly driven by risk aversion or supported by emerging domestic capital flows in Japan.
The next test: two central banks next week
The rally comes ahead of monetary policy meetings by the Bank of Japan and the US Federal Reserve next week, which will provide another test for the yen. The market widely expects the Bank of Japan to keep rates unchanged, while overnight index swap pricing shows about a 67% probability of a rate hike by December. However, some analysts caution that the latest move may not necessarily mark the start of a sustained yen appreciation trend. "Given the central bank meetings next week and the midterm elections afterward, I don't currently think this will develop into a sustained yen appreciation trend," said Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking Corporation.
Comments