Is the Japanese yen a haven asset for 2024?

While Wall Street hopes the worst is over, a deeper understanding requires examining the situation in Japan and the carry trade phenomenon. But another question arises: Is the yen set to become a safe haven?

The Japanese yen has been tightly linked with US tech stocks, which have driven market gains this year. Currencies fluctuate based on interest rate differentials, safe-haven flows during crises, and international trade dynamics. Could the yen's role be shifting towards that of a safe haven?

Japan has been stuck in a deflationary spiral for decades, keeping interest rates near zero. It recently moved into positive territory, raising rates to 0.1% in March and then to 0.25% last week. Meanwhile, US rates have been above 5% for a year, and the European Central Bank's rates are just under 4%.

This large rate differential has given rise to the carry trade, where investors borrow cheaply in Japan and reinvest in higher-yielding assets elsewhere. Ed Yardeni, president of Yardeni Research, discussed this on Yahoo Finance's Morning Brief show. Speculators borrowed yen at low rates, converted them into dollars, and invested globally, weakening the yen and strengthening the dollar.

Since 2010, this persistent pressure on the yen has doubled the dollar's value against it, a significant move for a developed-world currency. The Bank of Japan (BOJ) has occasionally intervened, but low rates have encouraged capital flight. Now, with the BOJ raising rates, international money is flowing back into the yen.

Leverage and volatility often feed on each other, causing rapid market movements. Markets survived the initial margin calls on Monday and Tuesday, but bear markets develop over time. Investors should also consider the broader US market conditions.

In late July, portfolios experienced a shift from megacaps to small caps and value sectors. Economic concerns and the Fed's potential rate cuts led investors to sell. However, Wall Street expects a quick resolution. Morgan Stanley suggests the selling is nearing its end, while JPMorgan estimates we are 50% to 60% through the carry trade unwind. Yardeni believes the process could conclude by the end of the week.

Given these dynamics, the question remains: Is the Japanese yen set to become a safe haven amidst global financial uncertainty? Only time will tell.