Not long ago, the yen was seen as a refuge in times of turmoil. Japanese companies had a reputation for repatriating overseas earnings when sentiment in global markets deteriorated sharply. Japan itself was seen as politically and economically stable, encouraging investors to buy the yen as a hedge against volatility.
Advertisement
Even today, Japan is one of the most attractive markets among the world’s leading economies. The results of Bank of America’s latest Asia Fund Manager Survey on September 16 showed that Japan was easily the most preferred equity market in the Asia-Pacific. The net percentage of respondents who said they had an overweight position in Japanese stocks rose to the highest level since Japan was included in the survey three years ago.
Yet the bullish view of Japanese shares stands in sharp contrast to the uncertainty pervading the country’s foreign exchange market. The yen, the world’s third most traded currency after the US dollar and the euro, has gone from being a perceived safe haven to a source of uncertainty and volatility.
Among the world’s major financial assets, the outlook for Japan’s currency is one of the most uncertain. The divide between asset managers betting on a stronger yen and hedge funds expecting the currency to weaken has reached its widest level since 2007, according to data from the Commodity Futures Trading Commission.
While investors began to question the yen’s safe haven credentials as far back as 2018, when the currency was weakening against the US dollar amid the eruption of the US-China trade war, the nearly 30 per cent decline in the yen since the beginning of 2022 has changed Japan’s foreign exchange landscape dramatically.
Advertisement
With the US Federal Reserve having just resumed its interest rate-cutting cycle amid cracks in the US labour market and the Bank of Japan (BOJ) under pressure to continue increasing borrowing costs because of persistently high core inflation, the yen is being buffeted by cross-currents.