Has the Yen lost its safe haven status?

Japanese economy has been stagnant since the Asian crisis. In an effort to stimulate growth and inflation the Bank of Japan has kept interest rates in the negative territory. Negative rates and lackluster stock market performance has pushed Japanese investors to overseas market. Japanese pension funds and banks hold vast amount of US treasury debt.

Negative rates make Japanese Yen a perfect funding currency for carry trades. Carry trades involves borrowing in low interest rate currencies and investing in higher interest ones. During good times Yen gets sold to fund carry trades. Yen normally strengthens during crisis times as speculators unwind their speculative bets in anticipation of asset repatriation and unwinding of carry trades.

This time is different. Yen has Weakened as the Russia – Ukraine invasion unfolded. Japan is a net importer of commodities from crude oil to grains. Russia-Ukraine crisis has disrupted supply of those commodities causing their prices to soar. Higher commodity prices will dampen the outlook of Japanese current account putting pressure on the Yen. Increasing pressure on the FED to hike rates to curb hot inflation is also putting upward pressure on US bond yields. Raising US bond yields and flat Japanese equivalents is causing the spread between them to widen. The yield spread best explains movements in USDJPY exchanges rates.#OPINIONLEADER#