10. May 2019, 16:04 Uhr
As Donald Trump has been ramping up the pressure on US trading partners, it is one of the favourite topics on the marketplace again: the Japanese Yen. Nippon’s currency is considered as a traditional “safe haven” in times of turbulence, tending to appreciate under these circumstances. Yet this time around, we project that not to happen or, if at all, in a markedly subdued fashion.
The reason rests with the very nature of the looming crisis in the global economy: a massive friction of trade. The Yen serves as a safe haven in times of geopolitical crises such as Brexit, the euro crisis in 2012, or simply herd-driven nervousness among investors. This time, however, things are different: Japan’s economy is particularly dependent on trade. Everything hampering or even blocking that exerts as much pressure on the Yen as it does on the Chinese Renminbi, the South Korean Won, or the Taiwanese, Singaporean and Australian Dollar, respectively.
In relative terms, the Yen might succumb to less pressure than those other currencies mentioned – much less anyway than emerging markets such as Turkey, Brazil or Indonesia (see post on net foreign debt levels). That said, it almost certainly will not show the customary tendency to appreciate.
And there’s even another factor running against an appreciating Yen in the months ahead – the Bank of Japan. Governor Kuroda and his colleagues rank among the world’s most determined “doves” in monetary policy. They have left no doubt about their intention to do whatever it takes to countereffect a strong appreciation in the Yen; even more so since the contribution of net trade to Nippon’s GDP has been deteriorating all over the past quarters which stood to worsen in a global trade spat.
Finally, Japan’s households as well as financial investors are facing particular pressure to buy foreign assets in the face of persisting negative rates at home. In the coming months, now, a huge wave of domestic bonds will come to mature, the released capital of which will need to be reinvested. In spite or even precisely because of global trade frictions effecting an extra-expansive policy reaction by the Bank of Japan, this capital will be heading overseas, thus aggravating the pressure on the Yen.
At the bottom line, we at best project a mild appreciation of the Yen against the US-Dollar as well as the Euro and the British Pound (against the two latter currencies perhaps in a more pronounced fashion, should a chaotic Brexit or other political crises in the eurozone occur); against the Singapore Dollar, too, the Yen might display some relative strength in the next 6-12 months. By comparison, though, the Yen’s performance against the Australian Dollar (if accompanied by much higher volatility currently at historic lows) as much as against the Korean Won or the Chinese Renminbi ought to turn out much weaker, since all three currencies stand to come under the same pressure primarily. That doesn’t mean the Yen will be facing a downward depreciation, mind: If it holds to its current levels or thereabouts, it already would validate its role as a safe haven in times of trouble.