1,000 yen, 5,000 yen and 10,000 yen banknotes are lined up in Kyoto, Japan, Thursday, November 2, 2023. . Photograph: Kentaro Takahashi/Bloomberg via Getty Images
Kentaro Takahashi | Bloomberg | Getty Images
Japanese JPY The yuan has traditionally been viewed as a safe-haven asset, protecting investors from economic and market turmoil — a status analysts say remains intact despite the currency's sharp swings this year.
The yen has experienced wild swings for much of 2024, with the currency depreciating to its lowest level since 1986, prompting the Bank of Japan to intervene to support the yen in July. In May, when the yen depreciated to 160 against the US dollar, the Bank of Japan earlier stepped in to support the yen.
After the Bank of Japan decided to raise interest rates in July, Japan's stock market and currency fluctuated sharply. As the yen strengthened sharply, the Nikkei Index suffered its largest one-day decline since 1987 on August 2.
The yen's volatility aside, analysts interviewed by CNBC said the yen's safe-haven status remains largely unchanged due to its “predictability.”
“Given that Japan remains the (world's) largest external creditor and (the country's) current account surplus and inflation are sustainable, we believe we can call it As a 'safe haven'. Deficits tend to weaken a currency, while surpluses strengthen it.
Hugh Chung, chief investment advisory officer at wealth and funds platform Endowus, said that when U.S. bond yields and stocks fall at the same time, such as the 2008 crash and the 2020 Covid-19-induced collapse, the yuan reliably strengthens.
On the other hand, if U.S. yields rise and stocks fall, the yen tends to weaken against the dollar during periods of risk aversion, Chung added, citing the scenario of the Federal Reserve raising interest rates in 2022 to combat inflation.
Mr Cheng attributes the yen's sharp swings this year to the huge difference in U.S. and Japanese government bond yields. The Japanese 10-year bond yield is just over 1%, while the U.S. 10-year bond yield is close to 4%.
Just before the Bank of Japan lifted its yield curve control policy on March 18, the gap was even wider, with the 10-year JGB yield at 0.796% as of March 16 (the last trading day before the BOJ’s policy announcement). , the 10-year Treasury bond yield was 4.304%.
This spread leads to what is known as the “carry trade,” in which investors borrow Japanese yen cheaply to invest in assets with higher yields.
The Bank of Japan raised interest rates, causing the yen to strengthen, with its exchange rate against the dollar rising by more than 12% in about three weeks, from 161.99 on July 3 to 141.66 on August 5, as investors rushed to close their positions. trade”.
Chung said the yen has not lost its sensitivity to U.S. interest rates and said it will remain a safe-haven asset during economic growth panics.
Is the Bank of Japan responsible?
SMBC Shinzo Abe said that the sharp fluctuations in the yen are caused by changes in the external market environment, rather than internal factors in Japan.
The most “powerful factor” in the high volatility seen in August was “excessive anxiety” about the possibility of a U.S. recession. The unemployment rate was higher than expected and job growth was lower than expected.
“Of course, I don't completely rule out the impact of the Bank of Japan's surprise rate hike in July, but it's only 15 basis points and the initial reaction to the BOJ's decision was quite mixed,” he added.
Abe said the market reaction would have been stronger if the Bank of Japan's decision was the cause of the volatility, adding that the yen “should have been bought back immediately after the Bank of Japan's decision, but that was not the case.”
The Bank of Japan's decision was announced during the trading session on July 31, but the yen only fluctuated significantly during the trading sessions on August 2 and August 5.
Yen Forecast
Abe expects the yen to trade at around 145 against the U.S. dollar this year, and any further strength will depend on the pace of interest rate cuts by the Federal Reserve, which he called “critical.”
He expects the yuan to rise to around 138 against the dollar by the end of 2025, with “some degree of high volatility,” adding that it could hit 130.
This volatility may come from the Bank of Japan's monetary policy actions, but Abe does not expect the Bank of Japan to raise interest rates “yet.”
He did not completely rule out the possibility of the central bank raising interest rates, and pointed out that second-quarter GDP showed a stronger-than-expected recovery in private consumption, which may strengthen the case for raising interest rates.
Chung's assessment is different: “Given that the 'carry trade' has been partially unwound and the central bank's actions may not surprise markets, yen volatility may have peaked this year.”
Both experts agreed that the direction of the yen may depend on the growth prospects of the U.S. economy.