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Could the Japanese yen be a good reflation trade?
- While the yen retains its safe-haven attributes, Japan’s exporters should be well placed to benefit from the global post-pandemic economic recovery
- Japanese government bond nominal yields may not put off investors, given the different outlook for real yields
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Expectations of a post-pandemic global economic recovery are underscoring a host of reflation trades. Investors seek to identify those assets which stand to gain the most from the joint impact of fiscal stimulus and central bank monetary policy support that is being deployed to mitigate the impact of Covid-19 on the world economy.
But value may sometimes be found in less obvious places. In the currency space, the Japanese yen may be a case in point.
At first sight, it might take some persuading to convince investors that the Japanese yen is ripe for a degree of appreciation from current levels. Yield returns on Japanese government bonds are derisory. Japan’s economy remains fragile and even if the Tokyo Olympics does take place this summer, the pandemic-related impact on attendance will surely deprive Japan of much tournament-derived revenue.
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Yet a poor outlook for Japan’s economy is not necessarily a negative for the Japanese yen, given that foreign exchange markets have long accorded the currency a safe-haven status in times of trouble.
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Indeed, precarious economic times in Japan can often be associated with local currency appreciation, as Japanese investors exit overseas holdings, converting the proceeds into the yen for repatriation and domestic deployment.
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