Is the Japanese Yen Still a Safe Haven Amid 2024's Volatile Swings?

The Japanese yen has experienced significant volatility throughout 2024, challenging its reputation as a safe-haven currency. Earlier this year, the yen weakened to levels not seen since 1986, prompting intervention from the Bank of Japan (BOJ) in both May and July to stabilize the currency. However, the yen saw a dramatic recovery, strengthening over 12% in just three weeks following a BOJ rate hike in July.

Despite these wild swings, experts believe the yen’s status as a safe-haven asset remains largely intact. Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation, argues that Japan’s status as the world’s largest external creditor and its sustainable current account surplus support the yen’s safe-haven appeal. Historically, the yen has proven resilient during periods of market stress, such as the 2008 financial crisis and the COVID-19 pandemic, by strengthening when U.S. bond yields and equities decline.

However, the yen’s performance in 2024 has been markedly influenced by the disparity between U.S. and Japanese government bond yields. The interest rate differential, with U.S. yields significantly higher than Japanese yields, has led to heightened volatility. The carry trade, where investors borrow in yen to invest in higher-yielding assets, has exacerbated these swings. The recent BOJ rate hike triggered a sharp shift as investors unwound their positions, contributing to the yen’s significant appreciation.

SMBC’s Abe points out that while the BOJ’s actions contributed to volatility, the primary drivers were external market factors, including concerns about a potential U.S. recession and its impact on global markets. The yen’s significant movements following the BOJ’s rate hike in July were not immediately apparent, suggesting that broader market anxieties played a larger role.

Looking forward, Abe forecasts the yen will trade around 145 to the dollar for the remainder of 2024, with potential strengthening to about 138 by the end of 2025, though with expected volatility. This forecast is contingent on the pace of future rate cuts by the Federal Reserve, which will be crucial in shaping the yen’s trajectory. Despite the current volatility, Abe does not anticipate further rate hikes from the BOJ in the near term but acknowledges the possibility if economic conditions warrant.