(Bloomberg) -- For all the weakness in the yen this year, history shows that Japan’s currency is still in the running to be a surprise haven for investors seeking shelter from the US presidential election.
Japan’s currency has beaten the greenback, Swiss franc, gold, Treasuries and euro — among the most popular safe assets — ahead of past elections, data compiled by Bloomberg show. In the run-up to the Nov. 5 vote, the yen is again the top performer during periods of extreme market stress, according to a Bloomberg analysis of moves in haven assets and implied volatility of US stocks.
The propensity of traders to turn to the yen when markets fluctuate wildly comes despite its status as the worst performing Group-of-10 currency this year. Former president Donald Trump has edged ahead of Democratic nominee Kamala Harris in betting markets, putting pressure on investors to game plan what a second Trump presidency would spell for assets everywhere. A clear outcome might not be reached until well after election day, a scenario that risks amplifying swings in every corner of markets and driving a search for safety.
“The yen is the best haven out there into the US election,” said Ales Koutny, the London-based head of international rates at Vanguard, the world’s second-largest money manager. He sees potential for the yen to rise against the Swiss franc “as the rhetoric with tariffs in Europe is much higher than versus some of the friendly Asian countries.”
That’s despite the uncertainty following Japan’s own election on Oct. 27. The yen dropped as much as 1% after the country’s ruling coalition failed to win a majority in parliament. The possibility of weeks of political wrangling before a new government is formed added to the intense selling pressure on the yen from the country’s wide interest-rate differential with other major economies.
Still, the yen has key strengths, investors say. Japan’s record ¥3.02 trillion ($20 billion) current-account surplus, deep yen liquidity and relatively low inflation all help make the world’s third-most traded currency attractive as a store of value.
Tariff risks also favor the yen. Japan has largely escaped direct threats of import duties from Trump during the campaign — warnings that keep investors on high alert for potential damage to targeted nations’ assets. Furthermore, at around 154 per dollar, Japan’s currency is trading at historically cheap levels, permitting more room for gains in the event of intense market swings or government intervention to support the yen.
The Bank of Japan is the only developed-market central bank that is currently even close to raising interest rates as its next policy move. While the BOJ is expected to keep rates on hold this week, if the yen’s current weakness adds to inflation, the odds of a hike later in the year will likely increase.
The yen was trading at 153.26 to the dollar at 8:43 am on Tuesday in Tokyo.
Safety Scorecard
Investors’ concerns about other traditional havens are also boosting the yen’s appeal. Uncertainty about the US election and the prospects of bigger fiscal deficits have eroded some of the confidence in the dollar and Treasuries. Neither Trump nor Harris has touted reducing the deficit as a key element of their campaign, leaving it a magnified risk for bond investors.
“If US bond markets are going to get indigestion from fiscal deficit risks, then Treasuries may not be the safest asset out there, and hence, the dollar,” said Stephen Miller, a four-decade markets veteran and consultant at GSFM, unit of Canada’s CI Financial Corp. “The yen is cheap and the BOJ is one of the few central banks that are still tightening.”
Pictet Wealth Management see risks of the euro falling to parity with the greenback on potential trade conflicts with the US. The Swiss franc lacks the liquidity of the yen and gold is trading around record levels, potentially limiting big gains in the event of a market meltdown.
There are of course dissenters on the yen’s appeal.
US Treasuries are better positioned to resist any selloff sparked by a decisive election victory for the Republican party, according to Morgan Stanley. Dollar supremacy is hard to challenge, considering the US currency dominates 88% of all trades in the $7.5 trillion-a-day foreign exchange market.
Japan’s benchmark rate of 0.25% is still hundreds of basis points below that of the US, leaving the yen as a favored funding currency in carry trades — where investors borrow in low-yielding currencies to fund purchases of higher-yielding assets elsewhere. This is one of the biggest factors in the yen’s weakness this year.
“The yen used to have a classic safe haven status but I’m not sure it holds that mantle anymore,” said Peter Boockvar, chief investment officer at Bleakly Financial Group in New Jersey. “It seems to trade more with interest-rate differentials right now.”
Still, market positioning suggest investors are at least less bearish on the currency compared with earlier in the year.
Hedge funds bought the yen earlier this month, while asset managers were equally bullish until last week, according to data from the Commodity Futures Trading Commission. Strategists also see the yen strengthening to 143 on average by the end of the year, data compiled by Bloomberg show.
“The yen is still a safe haven,” said Naomi Fink, chief global strategist at Nikko Asset Management, one of the biggest money managers in Tokyo. “If we saw de-risking, I would still expect the yen to appreciate and yen-funded ‘carry trades’ to unwind.”
--With assistance from Mia Glass.
(updates yen in 9th paragraph)
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