Macroscope | Why a global trade war might confound investors’ flight to the Japanese yen for safety

David Brown says given the state of the Japanese economy and trade war fears, the yen is not necessarily a safe haven for investors

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A pedestrian walks in front of a board displaying the exchange rate of the Japanese yen against the US dollar in Tokyo on February 6, 2017. The yen has historically been a bellwether for Japanese investor confidence on investing abroad. Photo: AFP

Published: 2:00pm, 18 Jun 2018Updated: 3:57am, 26 Jun 2018

When the going gets tough, it always helps to have a friend to lean on to carry you through. Investors soon learn who their friends are and who they can cling to until the storm blows over. In the past, the Swiss franc, Japanese yen, German government bonds and gold have all earned strong reputations as safe haven bolt-holes when financial markets have been in meltdown and the outlook for risk-taking has been in doubt. A friend in need is a friend indeed, as the saying goes.

The past decade might have put investors through the wringer, but the depths of the 2008 crash, Europe’s debt crisis and numerous other upsets have been made easier by the guardian angels of the safe haven trade. The worry now that the global economy is returning to normal is how to navigate the choppy waters of recovery with new squalls on the way. With the world staring into the jaws of a full-blown trade war, it may be time for investors to size up their safe haven bets.

The yen has always been seen as a favoured fallback option for investors during unsettled times largely because its price behaviour seems remarkably rule-based. In an age of algorithmic trading, investors see the yen as a good contingency, conforming to predictable behaviour patterns. At the darkest point of the 2008 crash, investors flooded into US dollars in a general flight to quality, but the yen became the cachet for safety as the dollar fell from grace in subsequent years.

The ironclad rule when market risk goes up is that the yen generally rallies. And when volatility eases, the yen invariably sells off. It is so simple that it is no wonder hedge funds and prop traders love it. But this has less to do with the yen’s true fundamental merit than with the ebbs and flows of Japanese investors flooding in and out of the currency as good and bad times roll. For savvy investors, the yen is not so much a bellwether for global market stability, but more a proxy for how Japanese funds feel about the state of investing abroad.

Japanese investor flows are so great they have a dramatic whipsaw effect on the yen. Outward investment flows have been the consequence of the Bank of Japan’s monetary stimulus limiting rates of return in the home market, forcing investors into higher-yielding investments abroad like emerging markets. At the first hint of trouble, Japanese investors beat a hasty retreat back home, to avoid the double whammy of both capital and currency losses incurred.

.css-1m2rp1p{color:#34b8b5;}Macroscope | Why a global trade war might confound investors’ flight to the Japanese yen for safety

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}David Brown says given the state of the Japanese economy and trade war fears, the yen is not necessarily a safe haven for investors

Macroscope | Why a global trade war might confound investors’ flight to the Japanese yen for safety

David Brown says given the state of the Japanese economy and trade war fears, the yen is not necessarily a safe haven for investors