Tokyo, we have a problem.
Last week, market tumult stemming from the U.K.’s vote to quit the European Union drove the British pound to its weakest levels in three decades.
Yet it also sent investors flocking to traditional safe haven assets like the U.S. dollar, gold and the yen, the latter surging against every major currency as the results of Brexit became clear: Dollar/yen spiked from a Thursday high near 107 to a two-year low near 99. Meanwhile, the pound lost more than 8 percent against the yen and the euro shed more than four percent to hit a three-and-a-half-year low.
Japan needs a weaker yen to boost the economy, but at least for the moment investors need a safe haven even more. So which one will win the tug of war?
“Classic risk aversion is in full manifestation,” said Alessio de Longis, portfolio manager in the global multi-asset group at OppenheimerFunds. “It’s a defensive currency in an environment where global growth is slowing.”
De Longis pointed out that the yen was already on a strengthening trend even before Brexit, with fears about the global economy festering.
The fallout means the currency is rapidly becoming a proxy for investors’ need for a shelter in a storm of continued uncertainty—and that complicates Japan’s efforts to engineer a sustainable economic recovery.
“There might be a limit of what the BoJ can do to prevent the yen from strengthening.” -Richard Hastings, macro strategist, Seaport Global Securities
A weak yen is a linchpin of Prime Minister Shinzo Abe’s policies—better known as “Abenomics” — to revive the world’s third-largest economy, which is also one of the globe’s largest exporters. Although Japan has muddled through decades of sluggish growth, its lack of external debt and a still wealthy society makes it an attractive haven for investors scampering from global risk aversion.