Will 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
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”.
In essence, therefore, for investors who continue to have concerns about the outlook for the Chinese and US economies, or perhaps even about just one, the Japanese yen may continue to appear attractive.
But what if such concerns are unfounded?
Last Friday saw a surge in US non-farm payrolls, with 312,000 jobs added in December, far above the median estimate of an increase of 184,000 that had been expected by economists polled by Bloomberg. US equity prices and the US dollar rose on the strong payroll data but the greenback gave back gains later in the session when Federal Reserve chief Jerome Powell said the US central bank would be “patient as we watch to see how the economy evolves”.
“We are always prepared to shift the stance of policy and to shift it significantly,” Powell said. If the Fed is moving some way towards the market, where expectations for further US central bank rate hikes in 2019 have already been reined back, then investors might see fewer reasons to find the greenback attractive. The yen might benefit by default.
Certainly, despite the robust US jobs data, it was noticeable that although the greenback did make some headway versus Japan’s currency on Friday, at the close in New York, the US dollar/Japanese yen exchange rate had not regained the level from which it fell so precipitately in the “flash crash”.
Additionally, if the Chinese economy performs better than currently expected, Japan may also benefit and, again, yen strength might be a by-product of such an outcome. Japan’s companies have made huge investments in China and China is an absolutely key export destination for Japan.
As for Japan’s economy itself, while it’s undeniable that the generation of inflation in the Japanese economy continues to prove stubbornly illusory, despite the Bank of Japan’s titanic monetary policy efforts, there’s an argument that circumstances in 2019-20 may fuel a “feel-good” factor that would benefit both domestic economic activity and encourage demand for the yen.
Emperor Akihito will stand down on April 30, to be succeeded by Crown Prince Naruhito, in the first imperial abdication in some two centuries. An imperial succession as a consequence of abdication rather than mortality arguably lends itself to a period of national celebration in Japan rather than mourning, with potentially positive implications for the Japanese economy.
Also, from September 20 to November 2, 12 cities in Japan will host the Rugby Union World Cup, with expectations for some 400,000 visitors from overseas, all of whom, of course, will need to acquire yen. And while that tournament should itself help engender a “feel-good” factor in Japan, its impact will surely be dwarfed in 2020 when the culmination of a multi-year infrastructure investment sees Japan host the summer Olympic Games in Tokyo.
Plus, even if Japan’s policymakers are uncomfortable with yen appreciation, their options are limited. The Trump administration would be unlikely to look favourably on Japan’s Ministry of Finance seeking to directly arrest yen appreciation.
Japan’s currency may have benefited from last week’s market “flash crash” but yen strength should be more than a flash in the pan.
Neal Kimberley is a commentator on macroeconomics and financial markets