Yen as a safe haven: A familiar yet painful refrain for Japan

Tokyo/Singapore, June 30: A weak economy, deflation, massive public debt, negative interest rates and an ageing citizenry don’t seem like good reasons for a country’s currency to surge, but that’s exactly what happened to Japan’s yen after Britain’s vote to leave the EU.

The safe-haven phenomenon is a huge headache for the Japanese government with few easy options to curb a rise that badly hurts the nation’s exporters and could tip the economy back into recession. The stronger yen was the main reason for an 8 percent drop in Japanese stocks last Friday when the Brexit vote became clear.

The yen has appreciated sharply due to a perceived rise in global risk at least a dozen times since the mid1990s, a study by the International Monetary Fund in 2013 showed.

“Japan...is a banker to the world,” said Martin Schulz, an economist at Fujitsu Research Institute in Tokyo. “And when risk goes up, you're looking for a safe 'bank'.”

Paradoxically the world's biggest debtor nation – whose public debt is more than twice the value of its gross domestic product — is also its biggest creditor, a status Japan has kept for the past quarter century.

It runs a persistent current account surplus — a broad measure of trade in goods and services. That was long due to a trade surplus but more recently to income from overseas investments that offset export declines.

Indeed, the value of assets held overseas by Japanese investors consistently exceeds the value of Japanese assets owned by foreign investors. Domestic investors own 90% of the nation's public debt.

When markets turn risky, Japanese companies, insurers and investors with money abroad bring some of it home, driving up the yen, while foreign investors also move into the Japanese currency as they look for shelter.

“When risk increases inter nationally, Japanese in- vestors pull capital back and inter national investors look for countries that are safe because they are lenders to the world,” said Schulz.

The so-called yen “carry trade”, in which investors borrow in yen at low rates and invest in higher return assets, can also contribute to a yen jump when there is financial turmoil, as global speculators unwind risky positions and pay back yen loans. This has occurred on and off since early 2000s, when Bank of Japan cut rates to record lows.

“Speculators live off leveraging funds in Japanese yen and Swiss francs with zero funding costs. The moment the position goes against them, they have to cut their positions and pay back the loans,” said Jesper Koll, CEO at fund manager WisdomTree Japan. “It's a riskoff currency.”

But Prime Minister Shinzo Abe and his policy makers have few powerful weapons left with the economy so sluggish and interest rates now negative. Reuters

Yen has appreciated due to a perceived rise in global risk at least a dozen times since the mid-1990s, an IMF study said