Safe haven currencies are currencies that appreciate in value during times of global turmoil and uncertainty, like the ongoing Russian – Ukraine war.
What makes a currency a safe haven for investors? Safe haven currencies tend to have low-interest rates, a strong net foreign asset position, and deep and liquid financial markets. Japan meets all these criteria.
1) Japan has a positive Net Foreign Asset Position (NFA).
The net foreign asset (NFA) position of a country is the value of the assets that the country owns abroad, minus the value of the domestic assets owned by foreigners. The net foreign asset position of a country reflects the indebtedness of that country.
If a net foreign assets metric is positive consistently and substantially, it is likely to increase the relative foreign exchange value of the currency, as it indicates a strong overall economy. Conversely, continually running an NFA deficit may be interpreted as weakness in the overall economy, leading to a decline in the relative value of its currency.
POSITIVE NFA (NET FOREIGN ASSETS) = STRONGER OVERALL ECONOMY & STOCK MARKET
NEGATIVE NFA (NET FOREIGN ASSETS) = WEAKER ECONOMY & STOCK MARKET
GLOBAL TURMOIL, FEAR, & UNCERTAINTY = JAPANESE INVESTORS SELLING FOREIGN ASSETS
= JAPANESE INVESTORS EXCHANGE THEIR FUNDS BACK TO JPY = MORE DEMAND ON JPY = BULLISH JPY
2) Japan has zero to negative interest rates.
The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned.
Each currency has a Central Bank behind it. The Bank of Japan (in Japan), for example, decides the interest rate for the Japanese Yen, and it’s similar elsewhere.
HIGHER INTEREST RATES = HIGHER COST OF DEBT
HIGHER COST OF DEBT = DISCOURAGES PEOPLE FROM BORROWING
LESS PEOPLE BORROWING = LESS ECONOMIC SPENDING
Businesses also have limited access to capital funding through debt, which leads to economic contraction. Economies are often stimulated during periods of low-interest rates because borrowers have access to loans at inexpensive rates.
LOW INTEREST RATES = LOWER COST OF DEBT = HIGHER SPENDING = STRONGER ECONOMY
3) The Japanese Yen is treated as a safe haven because many investors believe it is a safe haven.
In my opinion, this is the MAIN reason we see demand for JPY during some occasions of global turmoil and uncertainty. If you noticed, this section was called “Understanding Why Investors TREAT the Japanese Yen as a Safe Haven,” not why the Japanese Yen is a safe haven.
The classic F.X. investor story goes as follows:
The Japanese have more money invested abroad than any other nation in the world. When a crisis hits, Japanese investors get scared and want to liquidate their risky assets. The Yen being their home currency, they prefer having the liquidated money exchanged back for Yen to hide the money under the mattress. This massive demand for Yen causes it to appreciate.
However, if you take that story and look at the data behind it, you will realize that is not always the case.
Let’s take a recent global pandemic, COVID-19, as an example:
COVID-19 Pandemic = Global Fear and Panic
So, according to the theory presented by forex investors, at this stage, Japanese investors should be selling their foreign assets, converting their capital back to JPY, hence increasing the demand for JPY.
COVID-19 Pandemic Effect on USDJPY:
Not only did the Japanese Yen fail to perform throughout a huge global crisis and pandemic, but it did just the opposite; it depreciated. So, what happened? Why did the Japanese Yen depreciate? Write your thoughts down before flipping to the next page.
The Net International Investment Position (NIIP):
To understand why the Japanese Yen depreciated, you must know what a NIIP is.
The Net International Investment Position (NIIP) is the difference between the residents’ financial claims on non-residents and residents’ financial liabilities to non-residents. In plain English, for Japan, it is:
(WHAT THE JAPANESE HAVE INVESTED ABROAD) – (WHAT FOREIGNERS HAVE INVESTED IN JAPAN)
POSITIVE NIIP = MORE JAPANESE INVESTING ABROAD THAN FOREIGNERS INVESTING IN JAPAN
NEGATIVE NIIP = MORE FOREIGNERS INVESTING IN JAPAN THAN JAPANESE INVESTING ABROAD
NIIP NEGATIVE CORRELATION WITH THE JPY
According to the theory we’re judging; the NIIP should decrease during the time of a pandemic Japanese investors start selling their foreign assets.
HIGHER NIIP = BEARISH JPY
LOWER NIIP = BULLISH JPY
The Japanese Net International Investment Position:
Japanese investors broke the record with the highest NIIP, reaching 3,740.718 USD bn in Dec 2020.
Japanese investors did the absolute opposite of the main fundamental that makes the JPY rally during times of market fear.
Japan’s Foreign Reserve Value, USD:
Japan’s Foreign Reserve Value reached an all-time high throughout the COVID-19 pandemic.
JP BOJ Accounts, Assets, Foreign Currency Assets, JPY – Actual:
The real battle for Japan’s Yen: Safe Haven or Supporting the Economy?
It is no secret that Japan relies significantly on exports. They export machinery, computers, Vehicles, electronics, medical equipment, iron, steel, plastics, and many other items to the world. In the past, Japan managed to maintain a positive Balance of Trade (being a net exporter), in which the net trade of JPY was “buys.” In other words, countries importing from Japan bought more JPY from the market than Japan sold JPY to import from other countries. This net-positive balance kept the demand high for JPY and backed its ‘safe-haven’ status.
However, in recent years, Japan’s Balance of Trade started to march towards the negative territory slowly, and Japan is a net importer, again, as of 2021. This essentially means that Japan’s Yen is under massive pressure, as the country now is net-selling (more JPY sold) to the market to pay for its imports. This is a tricky situation to be in. The Central Bank of Japan maintained near-zero interest rates for too long to stimulate the economy, and now they have to act to curb the quickly depreciating JPY.
But there’s a catch. Raising the interest rates now will further hamper the already weak post-COVID economy. As we saw previously, the USD/JPY pair has been skyrocketing, and the JPY/XXX pairs are in free fall. The JPY continues to fall in value against most other major currencies, especially as the Central Bank of Japan continues to double down on its loose monetary policy.
So, a reasonable man should ask: if Japan allows the JPY to depreciate in times of turmoil and crisis, is the JPY still a safe haven? Did Japan choose to support the economy over its Yen’s value? If so, why would anyone be interested in JPY as a safe haven anymore?