MacroscopeWill the Japanese yen be a safe haven for investors in 2019?

Neal Kimberley says last week’s ‘flash crash’ that sent the yen soaring showed the currency’s draw when the jitters hit. Continuing market pessimism about the US and Chinese economies, and Japan’s own outlook, may add up to a good year for the yen

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Employees of the Tokyo Stock Exchange and models in kimonos celebrate the first trading day of the year on January 4. Photo: Kyodo

Published: 12:00pm, 8 Jan 2019Updated: 10:28pm, 8 Jan 2019

Last week’s “flash crash” that saw the value of the Japanese yen surge on the foreign exchange markets may have been a particularly violent move, but demand for Japan’s currency might not be just a flash-in-the-pan occurrence. Investors may well conclude that, compared to other economies, Japan’s prospects are good in 2019, resulting in steady demand for the yen.

The underlying drivers of the “flash crash” – as opposed to volatility exacerbators in the form of Japan-holiday liquidity-thinned market conditions and a probable overhang of yen-funded carry trades that had to be liquidated as the drama unfolded – illustrate that Japan’s currency retains a safe-haven allure when investors become risk-averse.

With markets already somewhat less optimistic about US economic prospects, market appetite for risk was further dented on January 2 when Apple announced that its expected fourth-quarter revenues would be materially below forecasters’ expectations, with a slowdown in sales in China a key factor.

In a letter to investors, Apple chief executive Tim Cook wrote that while the firm had “anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China”.

The consequent coalescence of investor concerns about the world’s two largest economies was the trigger for a bout of risk aversion on the currency markets, with the yen the primary beneficiary, even if specific market conditions produced the subsequent “flash crash”.