Has the Japanese yen lost its status as a safe haven currency?

As of the end of 2024, the exchange rate of the Japanese yen against the US dollar hovered at 156 yen, a 10% decline for the whole year, exceeding the 7% decline in 2023. Contrary to market expectations, the US Japan interest rate differential has not narrowed. Since 2023, the significant divergence between the Federal Reserve's interest rate hikes and the Bank of Japan's continued loose monetary policy has rapidly widened this gap. This has led to a surge in 'arbitrage trading', where investors borrow yen at low interest rates and invest in higher yielding assets.

Although the Federal Reserve did cut interest rates in 2024, the pace of rate cuts was slow and failed to effectively reduce interest rate differentials or curb the depreciation of the yen. Therefore, the interest rate differential between the United States and Japan remains significant, driving the yen to a historic low of 156 yen. The trend of speculative selling of the Japanese yen continues to expand, and it is expected that the volatility risk of the yen will continue to exist as we enter 2025.

Japanese yen as a safe haven currency

The Japanese yen has long been regarded as a 'safe haven currency'. Even in a low interest rate environment, due to Japan's stable government and massive foreign exchange reserves, the yen can still attract safe haven capital. However, Japan's long-term low interest rate environment and the loose monetary policy of the Bank of Japan have weakened the safe haven appeal of the yen. The negative interest rate policy and large-scale quantitative easing (QE) of the Bank of Japan have supported economic growth, but they have also lowered the yield of the yen and reduced its attractiveness as a safe haven asset.

Despite the significant interest rate difference between the United States and Japan, the Japanese yen still maintains a certain degree of safe haven demand amidst rising global uncertainty. In the face of geopolitical crises or global financial market volatility, the safe haven nature of the yen may come back into play, attracting capital inflows. For example, during periods of increasing global market uncertainty, the Japanese yen may still attract investors due to its stable government and strong foreign exchange reserves.

Looking ahead to 2025, the performance of the Japanese yen will be highly sensitive to global economic and geopolitical developments. With increasing market uncertainty, the Japanese yen may once again play the role of a safe haven currency. Therefore, investors need to closely monitor changes in the global situation.

summary

In summary, although the current economic environment and policies have put some pressure on the Japanese yen, its characteristics as a safe haven currency may still recover in the face of increasing global uncertainty. Investors should remain vigilant and pay attention to various factors that affect the trend of the Japanese yen.