Scott Sumner  

Questions about Japan

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The news media often reports that Japan is a "safe haven" country, and that the yen tends to appreciate during periods of international stress.

I don't doubt that this is accurate on one level; it's pretty obvious how the yen responds to global news. But what exactly does the term "safe haven" mean? What makes Japan safe? Is Japan less likely than Australia or Canada to be attacked by North Korea? Does its GDP fall by less than Australia or Canada's GDP during a global recession like 2008? Does it have a smaller national debt than countries like Australia and Canada? (Aren't all three answers a resounding "No"?) What makes Japan such a "safe" place.

I have my own theory (which has nothing to do with safety), but I'd like to hear your views first. I do have one request, however. Most of the explanations that I have read imply that an international shock that caused the yen to appreciate would also raise the value of Japanese stocks. I have an alternative theory that implies Japanese stocks would fall on safe haven type news, and indeed probably fall by even more than stocks in non-"safe haven" areas of the world. So how do Japanese stocks react to global news that causes the yen to appreciate for safe haven reasons?

COMMENTS (12 to date)
Floccina writes:

It seems to me that Japan is less similar to the other developed countries culturally that they are to each other and so less like to sink along with them. So not safer but less correlated.

Todd Kreider writes:

I'd have to think about it more, but it sounds like "Japan is a safe haven" is an empty statement.

I disagree with Floccina. At least Japan's GDP per capita has been growing since 2000 at the same rate as the US, UK and France, with Germany outperforming those three and Japan, through solid growth in 2003-2007, the recession in 2008/2009 and the post recession recovery.

Rajat writes:

I get the sense you are being provocative, which is why you're seeking your readers' views first...

From that intro, I think what you're getting at is that investors expect dysfunctionality from the BoJ, in that unlike the relatively functional central banks of states like Australia and Canada, investors do not expect the BoJ to ease policy (or not ease aggressively if you judge stance by concrete steppes taken) in the face of a negative global shock. This causes the Yen to appreciate during times of international stress. Japanese stocks fall during these times, but the exchange rate overshooting that tends to occur when other countries ease (or are expected to ease) means that in USD terms, Japanese equities tend to perform better than, say, Australian equities in the short to medium term.

Julius Probst writes:

Interesting question.
I haven't checked out the data in detail but it seems that the Japanese Yen tends to appreciate in the face of negative international and domestic shocks.
This was the case during the financial crisis of 2008, Lehman Brothers, and also the Tsunami, for example.
During those days the Japanese stock market fell for obvious reasons, sometimes even more than other markets.
The currency appreciation is then not the result of the safe haven status. It's simply the byproduct of unintentional monetary tightening, i.e the BOJ not offsetting those negative macroeconomic shocks with easier policies, maybe because of the ZLB, thus leading to currency appreciation.
It does not look like Abenomcis made this phenomenon disappear, at least not entirely.

dlr writes:

Hi Scott, Japanese stocks are not similarly safe havens by any measure for a developed country. Whether you look at realized volatility, option implied volatility, or correlations to global weakness, the Nikkei is reasonably volatile. On average, it has been notably more volatile and correlated to global shocks than Australia, Canada, the UK, Switzerland and the US and, again on average, France and Germany, to name a few.

Benoit Essiambre writes:

If you are talking about the Yen, my dilettante guess is that Japan's tendency to hit the ZLB hard and its central bank's tradition of being timid when it comes to pushing up inflation gives the Yen as well as Japanese government paper above market real returns on a risk adjusted, liquidity adjusted basis compared to global investment opportunities.

The relatively high return in Japanese government paper and the ease of substituting Japanese stock with it makes the paper form of saving more attractive than stock thus lowering the price of stock.

Ed Hanson writes:

There are only three huge and major currencies that qualify as safe haven. When speaking of safe havens, Australia and Canada just are not big enough to qualify. The choice between the Dollar, Euro, or Yen comes down to personal preference and familiarity. Not having much knowledge in currencies I would assume that any cost differential in conversion would have influence on choice. So would utility. If I had need for a safe haven, I would choose the one whose country I did transactions with the most.

And finally, I would choose the Swiss Franc over any of them. Being very, very, very little, I do not have the restraints the big boys do when looking for safety


sd0000 writes:

There was a Fed study on this. It's driven by the expectation of Japanese to draw back home their significant foreign investments and convert into Yen.

Jake writes:

I think you are thinking too much into it, the Japanese yield curve is below every other (except maybe Swiss, which is another 'haven' currency) so the carry trade of borrowing yen, loaning in anything else is attractive. This is a leveraged position, so when "risk" fears go up, this trade gets unwound and there is buying pressure on the yen.

So in other words, just a carry trade unwind.

Matthias Görgens writes:

Ed, as a little guy, the Singapore dollar might also be interesting.

Willy2 writes:

- When a currency rises against another currency then it simply means that demand for that one currency is larger than that other currency. Nothing more.
- Speculators borrow in yen (think: low interest rates), then sell yen and buy e.g. USD or EUR and then buy stocks and bonds denominated in e.g. Euros or USD.
- When this trade/speculation unwinds then the entire process goes into reverse and that pushes the yen higher. That's why the yen rises in "times of stress".

Willy2 writes:

- A rising yen is bad for japanese exports and therefore a rising yen should bring japanese stockprices down. That's why Japan sought to reduce the vaue of the yen in the mid 2010s.
- Although in the 1980s the yen rose and japanese stocks rose. But that was a sign of strong growth of the japanese economy.


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