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HSBC Pushes Back Against Claims the Yen Has Lost Haven Status

HSBC Pushes Back Against Claims the Yen Has Lost Haven Status

(Bloomberg) -- HSBC Holdings Plc strategists have doubled down on their take that the yen is a superlative option when it comes to havens amid global strains, pushing back against those arguing it’s lost its mojo as a refuge.

Diminishing Japanese demand for overseas direct investments, such as mergers and acquisitions, should ease outflows from the yen in coming months, HSBC said. Meantime, a surge in earnings on past direct investments, along with income on Japan’s overseas portfolios, means the country’s current account surpluses are assured, according to the bank.

Doubts about the yen -- long considered a safe harbor thanks to Japan’s status as the world’s largest net creditor -- had crept up even before the coronavirus crisis. JPMorgan Chase & Co. strategists last year highlighted how persistent capital outflows from Japan, for M&A and portfolio investments, had started to change the yen’s fundamental dynamics.

Skepticism then climbed in March, when the yen tumbled against the dollar amid the turmoil sparked by the rapidly spreading outbreak in the U.S. Japan’s currency lost 5% over two weeks, bucking past patterns when it rose during global equity sell-offs.

“We have heard many arguments that the yen is no longer a safe haven currency,” HSBC strategists Dominic Bunning, David Bloom and Daragh Maher wrote in a note Thursday. Yet HSBC “analysis suggests the yen stays safe in short, medium and long term,” they wrote.

HSBC Pushes Back Against Claims the Yen Has Lost Haven Status

At the end of the day, the clearest indication for HSBC is that the yen is up against the greenback for 2020 -- almost uniquely amongst major currencies, amid massive emergency demand for dollars.

What happened in March was an unusual episode that saw knee-jerk selling of almost everything against the dollar, including gold and, for a time, U.S. Treasuries. That’s not likely to happen again, thanks in part to the Federal Reserve’s moves to boost the global supply of dollars, the HSBC strategists said.

And the yen still did appreciate against most major currencies in that mid-to-late March period. Measured from the peak in the S&P 500 Index on Feb. 19, the currency even beat the greenback.

HSBC Pushes Back Against Claims the Yen Has Lost Haven Status

Meantime, there are some medium and longer-term capital-flow dynamics that add to the yen’s appeal, according to the HSBC team. One of them is foreign direct investment.

“With much slower global growth, and even signs of reversing globalization, Japanese corporates that have invested large sums overseas in this manner are likely to curb these outward purchases for a while at least,” the strategists wrote. “A decline in FDI outflows will also help the yen stay supported if risk aversion persists.”

Japanese FDI has been enormous in recent years as companies snapped up targets overseas to diversify their revenue from a largely stagnant, if not shrinking, domestic market. The total invested abroad has surged 75% since 2014, at more than 150 trillion yen ($1.4 trillion), according to HSBC analysis.

“Japanese income flows from FDI now exceed the inflows that Japan’s investors get on their portfolio of overseas bond and equity investments,” the strategists wrote. This is “a massive and consistent support to the yen.”

©2020 Bloomberg L.P.