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The Japanese Yen Is Changing Risk Management Concepts


Posted: Tuesday, September 15th, 2020

Estimated Reading Time: 2 minutes

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One of the most important currencies part of the FX dashboard, the Japanese Yen has long been viewed as having a strong correlation with risky assets. More precisely, it acted as a safe-haven in terms of a crisis.

But the correlation seems to have changed in 2020. Only several months earlier, the Japanese Yen pairs still participated in the risk-on/off rallies. Not long ago, the Yen shot higher every time North Korea launched a rocket. Or, every time the Dow Jones in the United States corrected, the USDJPY and other JPY pairs followed.

The latest monetary policy changes affected the Yen. It is no longer positively correlated with risky assets. It used to move tick by tick with the S&P500 – not anymore. Starting with 2020, risk management needs to adapt to a new Yen – a more independent one.

Japanese Yen

Shinzo Abe’s Resignation Is Not the End of Abenomics

When Shinzo Abe announced it is stepping down as Prime Minister of Japan, the Yen reacted. It got stronger, an opposite reaction when compared to what Abenomics stand for – structural reforms, easy monetary policy, sustained fiscal policy.

But the three principles are here to stay. Yoshihide Suga is the new leader of the ruling party in Japan. Later this week, he is expected to win his first term as Prime Minister, vowing to continue Abe’s reforms. He even retained the finance minister in Abe’s cabinet – a clear sign that Abenomics are here to stay.

What Changed in the Japanese Yen Pairs?

The JPY pairs used to be one of the most volatile of the FX dashboard. That is particularly true in the case of the USDJPY – a major currency pair, directly correlated to the S&P500 until recently.

However, the Fed leveled the playing field. By slashing the federal funds rate to the lower boundary, it reduced the interest rate differential. Also, by restarting the quantitative easing, it mimicked the Bank of Japan’s policy. Finally, the Fed plans to also buy ETFs (Exchange Traded Funds), just like the Bank of Japan does.

Therefore, with little or no difference between the two policies, the USDJPY changed. It mostly corrected after the 2016 Trump’s election. And it seems to wait for the U.S. elections outcome for the next move.

What Can Suga Do?

The expectations are that Suga’s policy will closely follow Abe’s efforts. But it does not mean that the market will react as it did when Abe was in charge. Because Abe’s term was about to end in a year’s time anyway, the decoupling of the JPY pairs with the risk-on sentiment may come from the market already changing its perspective.

The new leadership will have to prove itself worthy of continuing Abe’s reforms. If not, the JPY will further put pressure on inflation and on the Bank of Japan’s ability to fulfill its mandate.

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