For decades, the Japanese yen represented a safe-haven status in the financial markets. Has the COVID-19 pandemic changed the role of the yen in investors’ decisions?
The 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 against weak equities.
More precisely, when equities decline, investors find a safe-haven in Japanese yen. Different explanations exist for this phenomenon, and one of the most plausible belongs to the Japanese investors’ behaviour – they tend to park most of their money abroad.
But most recently, the USD/JPY sensitivity to US equity shifted. It has changed since the COVID-19 shock, and now it appears to have flipped because lately, the pair has a negative correlation with US equity 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 on the domestic markets. As such, the net international investment position in Japan tends to turn negative in periods of equity market declines.
Another way to view the net international investment position in Japan is to look at it as the difference between what the Japanese invest abroad and what foreigners invest in Japan. To have an idea, the difference is the 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 did go down when Japan’s net international investment position declined. Effectively, Japanese investors get scared by the decline in international financial markets and sold their foreign assets. In doing so, they sold their US equity market participation and the US dollar to buy Japanese yen and repatriate the funds.
This worked for many years, and now it appears to have stopped all of a sudden. Japanese investors no longer sell foreign assets during market turmoil, which is one of the reasons why the USD/JPY correlation with US equities has changed.
If this new behaviour is here to stay, or if it is just a reaction to the COVID-19 pandemic and the monetary and fiscal policies that followed, we’ll find out soon. In the meantime, investors should be aware of the fact that trading the USD/JPY the same way as in the last two decades might not work anymore.