For decades, the Japanese yen has been a safe haven in financial markets. Has the COVID-19 pandemic changed the yen’s role in investor decisions?
Safe haven status in financial markets belongs to assets that act as a store of value under stressful market conditions. The Japanese yen has been such a safe haven for decades, especially in the face of weakness in equities.
More specifically, when stocks fall, investors find a safe haven in the Japanese yen. There are different explanations for this phenomenon, and one of the most plausible is the behavior of Japanese investors, who tend to invest most of their money abroad.
But more recently, USD / JPY’s sensitivity to US stocks has shifted. It has changed since the COVID-19 shock, and now it appears to have reversed as lately the pair has negatively correlated with the US stock markets.
More money invested abroad by Japanese investors
It is known in the international financial community that Japanese investors have more money invested abroad than in domestic markets. This is why Japan’s net international investment position tends to turn negative during a downturn in the stock market.
Another way to think about Japan’s net international investment position is to think of it as the difference between what Japanese people invest abroad and what foreigners invest in Japan. To get an idea, this difference is largest in Japan, reaching over $ 3.4 trillion in the second quarter of last year.
We see from the chart above that the USD / JPY pair declined as Japan’s net international investment position declined. Indeed, Japanese investors were frightened by the decline of international financial markets and sold their foreign assets. In doing so, they sold their stake in the US stock market and the US dollar to buy Japanese yen and repatriate the funds.
It worked for many years, but it seems like it suddenly stopped. Japanese investors no longer sell foreign assets during times of market turmoil, which is one reason the USD / JPY correlation with US stocks has changed.
We will soon know if this new behavior is set to last or if it is simply a reaction to the COVID-19 pandemic and the monetary and fiscal policies that have followed. In the meantime, investors should be aware that trading USD / JPY in the same way as over the past two decades may no longer work.