The Japanese Yen – Carry Trade or Safe Haven Currency?

Posted on August 31, 2011

Currency Carry Trade – A strategy in which investors sell a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate and investment opportunities.

Safe Haven Currency – A currency that attracts capital investment and speculation flows, in times of uncertainty and disruptive economic and political moments.

A little more than a year ago, the Japanese Yen was trading in the 94 yen to the US dollar range on the world’s 3-4 trillion dollar a day foreign exchange markets. Today the yen is trading below 77 to the dollar, so what happened?

For years the Japanese yen was a friend to the carry trade speculators, who exploited the currency as an opportunistic vehicle for riskier yet more financially attractive investments. Since Japan is a major manufacturing and exporting country, this direction of money flows fit right in with Japan’s business and political leaders’ mind set. The lower valued yen gave Japan’s exporters a major selling advantage over it’s competitors.  This resulted in the continuance of considerable trade surpluses, and the eventual transition of sentiment that changed the yen from a low value carry trade currency to a strong safe haven monetary unit.

Even though Japan has one on the largest national budget deficits of all the worlds’ industrial countries, it is funded completely through domestic debt. Japan has no international creditors, due to the large trade surpluses that were initially fostered by the yen’s lower value.  How ironic then it is now, that because of those immense trade surpluses, huge amounts of funds are now pouring into Japan, lifting the value of the currency and transforming the yen into a safe haven destination. This adjustment has already begun to negatively impact on Japan’s exports. The stronger yen has made Japanese products more expensive, and with the global economy in slow motion Japan’s trade surplus numbers are contracting. For the first time in 31 years, Japan had a trade deficit in the month of April.

This raises the question:  If the high price of the yen persists in negatively affecting Japan’s trade numbers, will the Yen’s safe haven status eventually return to a carry trade currency?

For questions /information, contact Joel Borshof:

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