Yen’s safety status at risk from pandemic-era global rates collapse

Reuters London/Tokyo | Updated on September 30, 2020 Published on September 30, 2020

Investors may have to look for other safe havens

The coronavirus epidemic — and the collapse in global interest rates it has sparked — may have blown a hole in conventional market wisdom that Japan's yen strengthens during crises, triggering a warning bell for investors.

The yen has long been among the assets in greatest demand during disasters, when waves of overseas-held capital traditionally flee back to Japan, pushing the currency higher.

And for more than two decades, the trend has held.

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Since 1997, a 5 per cent fall in the US S&P500 index was accompanied 76 per cent of the time by yen appreciation, according to a study by Nordea.

In mid-March, when the pandemic shock was at its height, that didn't happen. US equities tumbled 9 per cent and 15 per cent in successive weeks but the yen fell, too. In subsequent sell-offs, including this month's 4 per cent equity slump, the currency has barely budged.

“The correlation with stocks didn't hold during the corona crisis, which is a game changer as to how everyone looks at the yen,” Andreas Steno Larsen, chief global FX strategist at Nordea Markets, said.

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The inverse 90-day yen-S&P500 correlation has since weakened to near decade-lows, he noted.

Between January 20 and September 9, the yen firmed 2 per cent against a basket of major currencies, State Street calculates — a stark contrast with its 27 per cent surge during the July-March 2008-09 crisis.

Any lasting shift carries profound implications.

Positive for Japanese economy

For Japan's export-reliant economy, having frequently contended with sudden yen spikes, it is a positive. Investors, though, face a hunt for other safe havens, should the yen lose that status.

It's a source of unease for investors such as Aaron Hurd, senior currency portfolio manager at State Street Global Markets, who uses the yen as a counterweight to risky assets in some investment models.

While Hurd doesn't believe the yen has shed its safe-haven role, he said its gains during recent risk-off episodes had been “a bit disappointing” and needed monitoring.

The yen's reputation stems from Japan's stash of foreign assets, at $3.5 trillion, the world's largest international investment position. But it is also linked to a well established market trend — the carry trade, where low-yield currencies are borrowed and then sold for higher-yield assets overseas.

That makes the yen prone to periodic spikes; when world markets go into reverse, so do carry trades, fuelling a mass rush back into the funding currency to limit losses.

But yen-funded carry trades declined to around 8 trillion yen ($75.5 billion) in July, estimates Tohru Sasaki, JPMorgan's head of Japan market research, down from a steady 10 trillion yen or so in recent years and a 2007 peak around 23 trillion yen.

What's changed is that this year's worldwide collapse in short-term rates has eliminated the yield discount the yen has held since 1995, when Japanese benchmark rates fell to 0.5 per cent.

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Published on September 30, 2020
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