Market Dynamics – Japanese Yen, The Safe Haven.

*Why is the Yen a safe haven currency that appreciates in times of global risk aversion?*

Happy Friday to you all, I am back with another market dynamics blog post to fully explain to you another part of the financial markets. This weeks blog post is about the Japanese Yen currency and why it always appreciates when global risk appetite is decreasing.

For a long time now, the Japanese Yen has been the worlds favourite currency, along with the Swiss franc (CHF) and the US dollar (USD), when the stock markets sell off and capital flows out of the more riskier assets. But why is that?

Japan has the highest levels of debt vs GDP of any country in the world. The levels of borrowing are huge so why is this countries currency so attractive? The table below shows the top 10 list of countries with the highest debt levels.

The first reason is because we are all sheep. The Yen as a safe haven has almost become a self fulfilling prophecy and now it is not even questioned as to why you should buy the currency when global uncertainty increases, instead it is just a case of how can you buy it.

To get to the bottom of why the currency is so valued when it appears the rest of the markets are falling, we must dig deeper into the countries economic data.

Current Account Definition – The current account records a nation’s transactions with the rest of the world, specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments—over a defined period of time, such as a year or a quarter.

Japan has always been a large export of goods and services and unlike the UK or USA it actually has a current account surplus. Japan exports more goods and services than it imports which is also achieved by the Swiss and hence why the swiss franc is also a safe haven currency. This means that the value of foreign assets held by Japanese investors is much higher than the value of Japanese assets held by foreign investors and when global uncertainty and risk off sentiment increases, money tends to “come home”. Therefore, the capital flows back in to Japanese yen is greater than the foreign capital flowing out of the currency.

Japan vs UK current account balance

As you can see on the chart shown above, the UK has remained negative (in a deficit) for all of the past 10 years whereas Japan has spent the majority of this time in current account surplus.

The other reason for Japanese Yen always doing well in times of risk aversion is because of “the carry trade”. I have covered this topic multiple times in my technical and fundamental analysis of various financial instruments on my blog. The idea is that investors borrow capital at a low interest and use that to invest in assets paying higher returns to pocket the difference as profit.

The Japanese Yen has had low interest rates for a long time with now negative interest rates, therefore the Yen is the best currency to use for a carry trade and that is why it always proves attractive to investors through all market conditions.

The table above shows the central bank interest rates for the major countries across the world. Leading the way is Switzerland with a negative interest rate of -0.75% followed by the Jaoanes Yen.

And as you will have probably guessed, the 2 favourite safe haven currencies are the Swiss franc and the Japanese yen. Both countries have negative interest rates and current account surpluses. Check out the chart below to see how the Japanese Yen value changed back in 2008 when the global financial crisis was beginning and global stocks were falling.

Yen (BLUE) vs Dow Jones Index (BLACK) around the time of the 2008 global financial crisis.

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DISCLAIMER: None of the information posted on this site is to be considered investment/financial advice. Trading is high risk and you should only trade with money you can afford to lose.

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