The Japanese yen has been on a tear lately, according to analysts like Kavan Choksi, and has appreciated against almost all major currencies. As the world slowly emerges from the Covid-19 pandemic, investors are looking for safe havens to park their cash. And with interest rates in Japan remaining at historically low levels, the yen is becoming increasingly attractive. Here’s what you need to know about this rising powerhouse currency.
Contributing factors
The Bank of Japan’s quantitative easing program has been key in driving the yen’s recent strength. By increasing the money supply and lowering interest rates, the BOJ has made the yen an attractive funding currency for carrying trades. In a carry trade, investors borrow in a low-yielding currency (like the yen) and reinvest the proceeds in a higher-yielding asset. This has helped to drive demand for the yen and push up its value against other currencies. The BOJ’s monetary policy has been especially effective in driving the yen’s strength since the pandemic began. By responding quickly and decisively to the crisis, the BOJ has helped to shore up investor confidence and support the yen. As a result, its monetary policy has played an important role in driving the yen’s recent strength.
The yen has been under pressure in recent months as safe haven flows and carry trades have pushed the currency lower. This appreciation pressure has been exacerbated by economic uncertainty as investors seek refuge in Japanese yen. The yield on 10-year Japanese government bonds remains near record lows, making the yen an attractive funding vehicle for carry trades. All of this is good news for Japanese exporters, as a weaker yen makes their products more competitive overseas. The resulting appreciating pressure on the yen has been exacerbated by safe-haven flows as investors seek refuge from economic uncertainty. The yield on 10-year Japanese government bonds remains near record lows, making the yen an attractive funding vehicle for carry trades. All of this is good news for Japanese exporters, as a weaker yen makes their products more competitive overseas.
But there are some key risks that could push the yen lower in the coming months. One is the potential for further BOJ intervention. The central bank has made it clear that it will do whatever it takes to support the economy and achieve its inflation target of 2%. So if inflation begins to pick up or economic conditions deteriorate, we could see more BOJ easing, which would weigh on the yen.
Another risk is that of a global trade war. U.S. President Donald Trump has repeatedly threatened to impose tariffs on Japanese imports if Tokyo doesn’t open its markets wider to American products. This could lead to a sharp sell-off in riskier assets like stocks and commodities, which would benefit safe haven currencies like the yen.
Closing thoughts
The Japanese yen has been on a strong run lately, thanks in part to accommodative monetary policy from the Bank of Japan and safe haven flows from investors seeking refuge from economic uncertainty. But there are some key risks that could push the yen lower in the coming months, including further BOJ intervention and a global trade war. So far, though, the yen has held up well and looks poised to continue its upward march in the months ahead.