The yen loses its luster as a safe haven
With USD/JPY trading above 140 and financial assets under pressure, one might think the yen is losing its safe-haven status. The data supports this idea. In 2020, when the world was rocked by the pandemic, USD/JPY had a positive correlation of 0.35 with the benchmark MSCI World equity index. This meant that when stocks fell, the JPY generally outperformed against the dollar, i.e. the JPY was seen as a safe haven. This year, the USD/JPY correlation with equities is now zero, suggesting that the JPY has lost some safe-haven properties. Why?
I would argue that this is due to two main factors – a) the nature of the crisis and b) the juxtaposition of US and Japanese macro-financial policies.
In the first case, the war in Ukraine has led to soaring energy prices. Since Japan imports all of its fossil energy, Japan’s terms of trade have collapsed – that is, the price Japan receives for its exports compared to what it pays for its imports. . This is a large negative income shock. This was most visible in Japan’s trade account. Last summer, Japan earned 6 billion yen a year from trade. Over the past 12 months, this trade surplus has turned into a deficit of 6 trillion yen due to higher energy bills. A safe-haven currency should generally be backed by a strong trade surplus, so there is a natural demand for a currency in times of crisis. The JPY lost this trade support.
When it comes to the US-Japan story, the US Federal Reserve and the Bank of Japan (BoJ) are about as far apart as you can get. The hawkish Fed has raised rates aggressively this year and promises to do more. The BoJ is one of the very few labor dovish central banks (joined recently by the People’s Bank of China). It continues its quantitative easing. In practice, this now means that holding a $3 million deposit earns 3% per year. Hold a deposit of 3 million JPY and you will still be charged 0.10% for fun. This rate differential of more than 3% sets the bar very high for the JPY to outperform as a safe haven currency.
The JPY would rally if stocks fell hard enough…
Two final points – I suspect that if US equities fell enough for the Fed’s tightening cycle to be significantly scaled back (and we haven’t seen too much of that this year), the JPY would outperform again and the USD/JPY would fall . I also suspect that USD/JPY is moving into an area where Japanese policymakers will show more overt concern – they stepped in to sell USD/JPY back to those levels in the late 1990s.
But equally, we are a long way from an 1980s Plaza-style deal to weaken the dollar in general. This would force the Fed to cut rates (very unlikely this year) or the BoJ to raise rates (again unlikely). So, given the way things are going this year, a jump to 150 certainly cannot be ruled out.