Yen tumbles: Has the safe-haven asset lost its shine?

The Japanese yen is losing ground at a remarkable pace, amid mounting economic headwinds and geopolitical tensions. Recent figures and a controversial statement by Prime Minister Takaichi are putting additional pressure on a currency traditionally considered a safe haven.

The sharp drop in technology stock prices on US stock exchanges last week raised questions on investment markets about whether the artificial intelligence bubble is about to burst. Meanwhile, the Japanese yen's continued loss of ground on currency markets is particularly noticeable. Along with the Swiss franc, the currency has a firm place among safe havens in uncertain financial times. There are two reasons why this has been largely unseen in recent weeks. First, uncertainty about the central bank's next move has increased significantly following the publication of economic figures. Last week, it was announced that the Japanese economy shrank by 1,8% year-on-year. Inflation, at 3%, was slightly lower than expected.

Take care
The central bank aims to stimulate economic growth and keep inflation around 2%. Recent figures suggest that raising interest rates isn't really necessary for the time being. Since the beginning of 2024, the official policy rate has been raised from -0,1% to 0,5%. A higher interest rate makes it somewhat more attractive to hold assets in a currency. Japan has the advantage of being the only large, developed economy where interest rates are clearly rising. The prospect of this rise slowing significantly after the recent figures is clearly hurting the yen. This also applies, incidentally, to a somewhat unfortunate statement from the new Japanese prime minister.

Travel warning
Sanae Takaichi has been leading the leading Liberal Democratic Party for a month. In the lead-up to her appointment as Japan's first female prime minister, she emphasized that she will pursue sound financial policies and that she is not Liz Truss. The British prime minister tackled the pound in 2022 by submitting an autumn budget with significant holes. Nevertheless, Takaichi has significantly damaged the yen. This wasn't due to an ill-conceived budget, but rather to a statement about Taiwan. In her view, a Chinese attack on that country could pose an existential threat to Japan. This could be a reason for the country to potentially engage in a military conflict. Takaichi's statement was therefore deeply ingrained in China, which has already issued a travel advisory against Japan.

Clouded relationship
In the first ten months of the year, the number of Chinese tourists increased by more than 40% to 8 million. A strained relationship with its large neighbor, which accounts for nearly a fifth of exports, could significantly impact the Japanese economy. Discussions are currently underway behind the scenes to normalize relations. However, the headwind for the yen is now so strong that it seems only a matter of time before the Bank of Japan boosts the currency with support purchases. Over the past three years, the yen has already managed to reverse a slide into a recovery several times. Given the underlying strength of the Japanese economy and the prospect of a rising policy rate in 2026, despite the negative news cycle, it is unwise to bet against the currency now.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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