March 11, 2020 / 2:15 AM / a month ago

Breakingviews - Japan is stuck with curse of safe-haven yen

Men walk past an electronic display showing the Japanese yen's exchange rates against world currencies in Tokyo, Japan, January 8, 2020. REUTERS/Issei Kato

HONG KONG (Reuters Breakingviews) - Japanese Prime Minister Shinzo Abe will struggle to lift the curse of a safe-haven yen. Market turmoil has sparked a stampede into refuges, such as gold, high-rated government bonds and the yen. While a sustained rally will hammer exporters, there may be little that policymakers in Tokyo can do about it.

The yen’s initial reaction to the coronavirus outbreak in China was to weaken, not least because of the trading ties between the two countries. But that’s changed as the virus has spread globally and after Federal Reserve Chair Jerome Powell unexpectedly cut the U.S. policy interest rate last week. The latest lurch higher in the Japanese currency came on Monday when tumbling oil prices sent global markets into a tailspin. The resulting stampede into safe havens saw the yen appreciate to its strongest against the dollar since 2016.

That erodes the international competitiveness of export-dependent heavyweights such as Hitachi, Nissan Motor and Panasonic, and explains why Bank of Japan chief Haruhiko Kuroda said on Tuesday he would respond to any economic damage that currency might inflict. His options are, however, limited given policy rates are already below zero, and the central bank has been buying assets for years.

Japan could intervene in the currency markets by selling yen for dollars. Such solo action is unlikely to work, however, and will irk other major industrial nations. OECD data puts the currency’s fair value in purchasing power parity terms at 103 per dollar. Given Japan already meets two of the U.S. Treasury’s three criteria for currency manipulation, open intervention would tick the third box. It might also trigger a tit-for-tat currency depreciation in China.

Another option is stealth action by the Government Pension Investment Fund, which manages $1.6 trillion of assets and could sell yen to finance purchases of overseas assets. But even the GPIF’s best efforts may flop given daily trading volumes in the foreign exchanges were a massive $6.6 trillion, according to the most recent Bank for International Settlements data. What would help is calmer markets since this would dull the yen’s safe haven allure. That is out of Abe and Kuroda’s hands.

Breakingviews

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