Will the Japanese Yen become a safe-haven asset again? – March 2022

The Japanese Yen was for some time considered a safe-haven currency kind of like the Swiss Franc. It has low interest rates, a strong net foreign asset position, liquid markets and is backed by a stable economy. The currency of the worlds third largest economy with more than 100 million people has not been doing well recently, depreciating against the US dollar. The long-standing problem with Japan has been low growth and deflation. Before an effort by the then-prime minister Abe Shinzo to jumpstart the economy, the Yen had been proven to be a safe-haven currency, appreciating when US stocks decline, US bond prices increase and volatility increases. His appointment of Kuroda Haruhiko as governor of the Bank of Japan began the decline of the Yen as a safe-haven with the central bank’s massive purchases of bonds and equities.

It could be worthwhile to pick up something in the Japanese stock market at the moment as the Bank of Japan unwinds its bond-buying program and stops a covid-19 loan scheme. Although the bond-buying did not do much in terms of growth over its period of use, higher inflation is now expected to start hitting Japan in the next few months and could cause a shift in central bank perspective towards higher interest rates and more hawkish bond-buying. Russia’s war with Ukraine and the subsequent squeeze on commodities as well as sell-offs in American stocks as interest rates take hold and as the impacts of war are slowly realized could be good news for the Yen. Japan’s stock market is trading at 13.6 times expected earnings, undervalued compared with other economies and potentially undervalued in terms of its currency. Buying say a Japanese bank or a robot company or a car company may be worthwhile if the Yen regains its status as a safe-haven asset.

Sources:
https://www.reuters.com/markets/currencies/exclusive-boj-debates-messaging-eventual-rate-hike-inflation-perks-up-2022-01-13/
https://www.imf.org/external/pubs/ft/wp/2013/wp13228.pdf

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