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Investors favoring yen over more lucrative currencies

Investors favoring yen over more lucrative currencies

After years of gorging on Japanese credit to buy lucrative assets such as Icelandic bonds, Brazilian equities or the Hungarian forint, investors are now rushing back to the safe-haven yen, which is soaring.
The stampede out of stocks, commodities and other risky assets drove the yen up to a 13-year high against the dollar and to a six-year peak versus the euro on Friday as investors piled back into the currency.
"The yen is seen as a safe-haven currency so when risk aversion is intense it strengthens," said Tomoko Fujii, head of economics and strategy at Bank of America in Tokyo.
The worst global financial crisis in decades appears to have heralded the demise of the so-called "carry trades" - selling low-yielding currencies such as the yen to buy more lucrative currencies and assets elsewhere in the world.
For years these paid off handsomely for many investors who borrowed debt in Japan at rock-bottom interest rates to buy currencies such as the Australian dollar, the South African rand, the Polish zloty or the Icelandic krona.
As the popularity of the carry trade grew, investors also "poured borrowed money into the most risky assets from emerging debt and equities to commodities," economists at Societe Generale wrote in a note.
With global stock and commodities markets plunging, the carry trade gamble has lost its appeal and many investors are hauling their money back to Japan, anxious not to suffer big foreign exchange losses as the yen soars.
The carry trade was popular with ordinary Japanese but many now appear to have made a swift exit, said Fujii at Bank of America.
"They suddenly surrendered and they haven't moved much recently," she said.
The strength of the yen is bad news for Japanese exporters because it cuts into their repatriated earnings. The currency's rapid ascent has contributed to a 50-percent plunge in the value of the Nikkei stock index this year.
But that hasn't deterred people from buying the yen, which is seen as the best of a bad bunch of global currencies.
"The yen is turning to a safe-haven currency by default because everybody else looks so vulnerable," said Professor Noriko Hama of Doshisha Business School.
Although Japan's economy is widely believed to be in recession, one advantage that it does have is that its banks have been less severely affected by the global credit crunch than those of many other countries.
Another factor supporting the yen is that investors expect further interest rate cuts in overseas economies, which would reduce the yield advantage of many of the yen's rivals, which suffered sharp losses last week.


Updated : 2021-06-23 10:19 GMT+08:00