UBS House View Daily

Thought of the day

06.09 - Is the yen really a safe haven asset?

The Japanese currency behaves like a safe haven asset. Paradoxically the yen has even risen 1.4% since North Korea announced a successful hydrogen bomb test on September 3, despite Japan's vulnerability in the event of a military conflict. The yen has also benefited from other periods of risk aversion, appreciating by more than 20% against the US dollar during the global financial crisis and by 10% versus the euro during the European sovereign debt crisis. This is often attributed to Japanese investors, who are the world's largest creditors, retreating to the safety of their home market in troubled times and so boosting the yen.

But we believe this yen appreciation owes more to the Japanese currency’s role as a global funding currency for carry trades:

  • Japan’s near-zero interest rates mean the yen is a major source of capital for carry trades, where investors borrow money in a lowinterest rate environment and invest it in higher yielding (riskier) assets in other countries. During risk-off periods investors unwind these trades, increasing yen demand.
  • A 2013 IMF study found that yen riskoff appreciations appear unrelated to capital inflows, but can be better explained by forward hedging and net reduction in yen short positions.

So, we don’t expect the yen to appreciate sustainably because of periodic flare-ups in geo-political tension. The resulting yen movements are likely to be short-lived, rather than persistent inflows. Our 12-month forecast for USDJPY is 110, versus 108.70 at present and compared with fundamental fair value of 77.

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