The Yen

Thesis

The Japanese Yen (JPY) has traditionally retained a reputation as a “safety asset” due to the depth of its liquidity and Japan’s large current account surplus. During previous market corrections, the Yen has appreciated 4 to 5 percent. Given the prevailing weakness in the Yen, the tariff wars may be a catalyst for strength in the months ahead.

Analysis

Let’s revisit some of the previous corrections and see the movements in the Yen; there are a few recent occassion with strong corrections in the S&P 500 worth revisiting.

During the Global Financial Crisis, the Yen rallied by almost 15 percent initially, and held a sustained appreciation of 10 percent for the months after Lehman’s collapsed in Sept 2008. The GFC was the beginning of a multi-year bull market in the Yen, which saw highs of below 90 by the end of 2010.

In August of 2011, although it wasn’t a prolonged financial crisis, Moody’s issued the 1st ever downgrade of U.S. sovereign debt, which led to a global sell-off of equity markets. The Yen correspondingly strengthened by 6 percent.

In mid-March 2020, investors began to recognize COVID would grow into a global pandemic, and the S&P began to tumble. The Yen had a brief rally of 5 percent, and remained reasonably stable in the months ahead.

As we now embrace a new era of “tariff wars”, although the S&P has had a substaintial correction, the Yen has observed only a slight appreciation of 2 to 3 percent.

Considerations

In 2015, Shinzo Abe introduced a new econmic regime, Abenomics, which effectively devalued the Yen, and it has demonstrated weakness for most of the past decade. It’s possible that the “flight to safety” characterisitics it held in the past are nolonger relevant.

As China is the main focus of political tension in the tariff wars, one possible outcome of 100% tariffs imposed on China would be a material devaluation of the Remimbi. This potentially would pull down all the regional Asian currencies with it. The Yen would not rally in this case.

More concerning; the winds of policy movements are shifting everyday in this current geopolitical backdrop. Any day wwe could see a “Tariff Pivot” announcement with a US-China recalibration (which may just be the goal of all this tariff jostling) and this would ingnite another strong market rally in the S&P (and weakening the Yen).

Anyone travelling to Japan the last couple years would recognize the strong purchasing power of USD in Japan. The Yen has been a “pain trade” for those value investors (and me) over the past couple years that view it’s weakness as an entry point.

If I weren’t already long, I’d buy.