The Japanese Yen is one of the world’s major currencies and is considered a safe haven by Western investors: they flow to Japan whenever there is turmoil on the other side of the Pacific.
This time was no difference. While the United States were shutting down their economy due to the current crisis, and panic spread in capital markets, the Japanese Yen confirmed its role as a safe haven currency, as the table below shows (USD to JPY, 2020):
The point is, why should we be surprised about it? Well, there are a few reasons to be skeptical about the yen as well.
Japan’s High Debt And Aging Population
Japan experienced a meteoric rise from the 1960s until the late 1980s, when a huge real estate and financial bubble popped. The resulting crisis plunged Japan into a 20-year depression, and left the country with a record national debt to GDP of almost 240%, the highest ratio in the world.
Moreover, Japanese people are the oldest in the world, which, combined with Japan’s notorious aversion to immigration, results in a continuously shrinking population, which makes the debt even more unsustainable.
Given that the extraordinary liquidity injections of the last decade by the Bank of Japan have generated inflation of not even 1% a year, one would expect even more money printing, therefore, currency devaluation.
Why The Yen Remains A Solid Currency
And yet, the Japanese yen continues to be a solid currency. It is worth roughly the same than in 2008 at the onset of the Great Financial Crisis.
There are two explanations, one is purely economical, the other is political.
Japan is still the 4th largest economy in the world, it is the 4th largest exporter, and has the 2nd largest current account balance, which translates in foreign reserves of almost USD 1.3tn, second only to China.
Therefore, the Bank of Japan can successfully intervene on any attempt to speculate on the Yen; it is actually called the widow maker for having made bankrupt many hedge funds that tried the trade.
The second reason is political. Japanese people are nationalistic, and they prefer to hold domestic government bonds rather than foreign assets, even if they might get a higher return.
Until the Japanese people, with their work and behavior, keep the music going, the Japanese yen will remain as reliable as a Toyota.
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