LONDON- With no truly safe bets during a wild year for financial markets, there’s now a hunt to cover all eventualities and Japan’s yen could offer a peculiar twin role.
After a shocking start to the year, global equities are almost back to square one even though many economies are still only running at about 50 percent of pre-pandemic activity levels.
Traditionally, portfolio managers have used government bonds as “ballast” to protect higher-risk conviction bets against economic or political shocks – assets that gain in bad times. Other “risk-off” stabilizers typically include gold or exposure to “safe haven” currencies such as the yen or Swiss franc – and there’s also then a blend of sectoral rotations, switches from small to large-cap stocks or relative yield plays in credit.
But inflation-adjusted sovereign bond yields across most developed economies have evaporated to near zero out to 10 years amid hyperactive central bank bond-buying and expectations central bankers will sit on yields for years to come to keep the accumulated government debt mountains sustainable.
Japan’s yen may provide one the few plays that gains from both ongoing recovery and fears of a second wave.
Though its “safety” attributes are often debated, their origin goes back to the 1980s when markets feared massive Japanese investment overseas would be suddenly repatriated in the event of a domestic shock like a devastating earthquake and lift the yen in the process.
More generally, the idea simply riffs off persistent Japanese current account surpluses over time and the assumption that scared money goes home. But whatever the evidence to back that argument, knee-jerk correlations in moments of global stress have tended to reinforce the idea over time.
The yen and the US dollar have jostled for the role of safe harbor during this shock, however.
The yen initially surged almost 11 percent against the dollar over 12 trading days as the pandemic unfolded at the end of February.