June 19, 2016
Recently there have been a lot of headlines regarding the Yen’s strength (FYI- there’s a distinction shared by the Swiss franc which is also often considered a safe haven currency but that is a another story..) due to market uncertainty surrounding the Brexit issue.
Two factors I wanted to touch on that explains the dynamic of why the Yen is considered a “safe haven” currency:
- Japan has always been a large exporter and has continually exported significantly more goods and services than it imports. The result has been decades of current account surpluses that have positioned Japan as a net creditor to the world. Japan also has the highest debt-to-GDP levels, however, as investopedia stated: traders often balance the high debt level of Japan with its high trade surplus.
- The Yen is a favorite to finance currency carry trades since Japan’s interest rate is so low (note at the time of this writing BOJ recently adopted a negative interest rate policy; Japan’s current interest rate is -0.01%). From Investopedia: A carry trade is a strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. This strategy is very common in the foreign exchange market. So in other words, investors can borrow Yen at a very low interest rate and buy a higher yielding asset/and/or currency.