Is the yen a safe haven again?

What happened

As technology shares fell on doubts about the artificial intelligence boom, the yen rose. It gained about 0.9% against the dollar on 22 October and on 23 October briefly reached about 156 per dollar, its strongest level in more than a month, before giving back part of the gain. It was on course for its best week since early September.

In a note dated 23 October, strategists at Goldman Sachs argued that the yen is becoming a better hedge against a market shock again, especially one that pushes share prices and bond yields down at the same time.

Why the yen stopped being a safe haven, and why that may be changing

For decades the yen rose in a panic. Japanese investors hold large amounts of foreign assets, and when markets are frightened they bring money home. Investors who had borrowed in yen to buy higher-yielding assets abroad, the carry trade, also rush to repay.

That pattern broke in 2022. Global interest rates jumped while the Bank of Japan held its own rates near zero and capped Japanese bond yields. The gap pushed money out of Japan, and the yen fell almost whenever global yields rose, even on days of fear.

Japan’s policy has since changed. The Bank of Japan has raised its rate to 1.25%, the highest in over three decades, and Japan’s 10-year yield is near 2.8%. With a smaller rate gap, the yen falls less when global yields rise. Goldman notes that the yen’s reaction to rising yields has recently been weaker than at any time in six or seven years.

Where it sits in the chain

This is the safe-haven mechanism at work in currencies: fear lifts the currencies investors trust or are short of. It also shows how central bank policy shapes that role. A currency with near-zero interest rates is cheap to borrow and easy to sell; one whose rates are rising is less so.

The yen is still weak by historical standards. Japan’s large energy import bill keeps pressure on it, and one rally does not make a trend.

What to watch

• The Bank of Japan on 30 October. Markets expect a hold, with the next rise in December.
• Whether the yen keeps rising on days when shares fall.