ADVERTISEMENT

The Old Yen-as-Haven Trade Just Isn't Panning Out as It Should

Dealers’default tried-and-true trading strategy of buying yen when geopolitical tensions rise hasn’t been paying out so much.

The Old Yen-as-Haven Trade Just Isn't Panning Out as It Should
An employee holds Japanese 1,000 yen banknotes at a checkout counter of an Akidai YK supermarket in Tokyo, Japan. (Photographer: Akio Kon/Bloomberg)

(Bloomberg) -- Buying the yen when Treasury yields dive and geopolitical tensions rise is one of the default trading strategies in any dealer’s playbook. But lately the tried-and-true tactic hasn’t been paying out so much.

True, Japan’s currency is the best performer among the Group-of-10- currencies this month, up around 2% against the dollar. But it’s barely changed for the year, and that’s even as the benchmark U.S. 10-year Treasury yield has tumbled to the lowest since September 2017. And the recent gain is a fraction of the 6% seen in the first quarter of 2018, when there was arguably less turmoil.

The Old Yen-as-Haven Trade Just Isn't Panning Out as It Should

What might be different now is the unprecedented pressure on Japanese companies and institutional investors to put money abroad. Indeed, the rolling three-month average for portfolio and direct investment outflows just hit a record, according to data compiled by Bloomberg.

Part of that is the realization the Bank of Japan has missed the window for normalization. For the first time since the 1990s, it didn’t follow the Federal Reserve in a tightening cycle. That means a 0% policy target for 10-year yields as far as investors can project, so the incentive is more powerful than ever for Japan’s funds to go abroad.

JPMorgan Chase & Co. tots up some 44 trillion yen ($403 billion) in Japanese government bond redemptions for the current fiscal year, the bulk of which could be destined for new investments overseas.

Add that to prospects for sustained outbound merger-and-acquisition flows. In the past four years, Japanese companies have purchased at least $89 billion in overseas targets -- an unprecedented pace that’s set to continue this year. As with the BOJ, prospects are for this to continue indefinitely, given that Japan’s shrinking population means businesses are looking to bolster their global footprints.

The Old Yen-as-Haven Trade Just Isn't Panning Out as It Should

Some still anticipate bigger yen gains in the offing. Standard Chartered Plc says if the U.S.-China tariffs go all out, the yen will approach 100. It was at 109.25 as of 4:06 p.m. in Tokyo.

But taking a step back, Tohru Sasaki and Maoko Ishikawa at JPMorgan sense a turning point has been reached, almost coinciding with the changeover in Japan’s imperial era.

“The trend may be seen as capital flight on a minor scale,” Sasaki and Ishikawa wrote last month. “Japanese companies and institutional investors have increased their overseas investment because they have had little choice.”

--With assistance from Eric Lam, Manuel Baigorri and Masaki Kondo.

To contact the reporter on this story: Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Tan Hwee Ann, Jenny Paris

©2019 Bloomberg L.P.