Japan Is Still a Haven, But It’s Tougher to Make a Buck on the Yen

Buying Japanese currency when the rest of the world looks wobbly is a classic trade. Japan’s current-account surpluses and its holdings of everything from U.S. Treasuries to foreign real estate mean it doesn’t need to borrow from anybody. Investors, including those in Japan who have accumulated overseas assets, are confident about parking money in Japanese bank deposits or government bills when they want to ride out a storm. That, in turn, is good for the value of yen. And going into yen is an easy trade to make: Dollar-yen is the world’s second-most-traded currency pair, after euro-dollar, making it extremely liquid.

But this textbook move isn’t working quite as well as it used to. In the first 30 minutes of trading that Friday, as futures on the S&P 500 Index of stocks tumbled 1%, the yen advanced only 0.2%. It took some additional protectionist trade rumblings from China later in the day before the yen recorded a 1.2% rise.

That modest-looking daily move turned out to be the biggest gain for the yen in two years. It’s a notable contrast from the past, when Japan’s currency could make a move that big—or bigger—in minutes. (For example, when the U.K.’s Brexit vote became apparent on a Friday in June 2016, the yen leapt as much as 7.2% against the dollar.) “This morning’s news was shocking—suddenly Trump imposes tariffs on Mexico—so, a new agenda for the market,” as Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co., puts it. The dollar-yen should have responded immediately. “This is a kind of structural change.”

Indeed, as Trump slapped tariffs on China in May, the yen proved the best-performing major currency. But take a step back and it’s barely up this year, with a dollar buying 108.09 yen on June 4, compared with 109.69 at the start of the year. That’s during a period that’s seen both the escalation in trade tensions and a major dovish shift by the U.S. Federal Reserve that ought to have reduced demand for U.S. dollars.

Sasaki, who once served as a senior currency dealer at the Bank of Japan, says a few things have changed. First is the widespread recognition in Japan that its central bank is still a long way from even contemplating normalizing monetary policy after an extended period with interest rates at zero. That’s in contrast to the Fed, which raised interest rates and shrank its bond portfolio in recent years. Rates are so low in Japan that a junk bond was marketed last month with a coupon of 0.99%.

That means Japanese institutional investors—from banks and pension funds to the postal system, which has $1.7 trillion in savers’ deposits—have had to send much of their money abroad to earn a positive return, helping to boost demand for other currencies, relative to yen. “It’s a minor version of capital flight. It’s not that people don’t think it’s safe to keep money domestically, it’s that they think there is no return in Japan,” Sasaki says.

Japanese companies’ behavior is another consideration. They announced more than 1,000 offshore acquisitions last year, totaling a record $191 billion. Japanese takeovers run the gamut from pasta sauce and beer to banking and pharmaceuticals. Mergers-and-acquisitions specialists expect that trend to continue, with many businesses seeking to increase the external share of their revenue, given the contraction in Japan’s home market, whose population is shrinking by more than 400,000 each year.

Strong demand for dollars and other foreign currencies means investors are happy to “buy the dip” in the dollar vs. yen whenever investors start to move to Japan’s currency as part of safe-haven trade. That slows the fall of the dollar and cuts off some of the yen’s gain.

So where are investors likely to go instead? Even with yields dropping nowadays, the U.S. stands out for its positive returns. Ten-year Treasury rates were at 2.16% on May 31, vs. -0.09% for Japan and -0.20% for German equivalents. “The dollar has been taking away the mantle of safe haven” thanks to interest-rate differentials, says Jane Foley, head of currency strategy at Rabobank International in London. “I think the flow into yen as a safe haven remains, but for us to see it go down to, say, 105, you’ll need to see a major geopolitical shock happen,” she says—such as a looming U.S. conflict with Iran.

©2019 Bloomberg L.P.