Neal Kimberley

How the Japanese yen stays strong despite a faltering domestic economy

The yen’s strength derives from its safe-haven status and the fact that much of Japan’s wealth is held overseas, in foreign assets and currencies; in a crisis, investors repatriate the yen, boosting its demand and giving it strength

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The Bank of Japan, reflected in the glass wall of its adjunct museum in Tokyo. Historically low to negative interest rates have forced Japanese investors to seek returns outside Japan. Photo: AP

Neal Kimberley

Published: 2:00pm, 26 Nov 2019Updated: 10:25pm, 26 Nov 2019

Japan’s economy is not in great shape. Policies that have arguably not proven that successful in the past are being dusted off yet again. But Japan’s currency will not necessarily weaken.

A cocktail of domestic economic woes might ordinarily lend itself to currency weakness but the Japanese yen has a habit of holding its own or even strengthening when Japan has problems.

The year 2011 illustrates the point. In March that year, a massive earthquake and the resulting tsunami off Japan’s Pacific coastline killed more than 10,000 people and caused a nuclear meltdown at the Fukushima power plant. Such was the reaction in the currency markets to the disaster that the central banks of the Group of Seven major economies intervened.

However, the G7 banks did so not to stop the yen falling, but to try to arrest a surge in its value that, by undermining the competitiveness of Japanese exporters, threatened to exacerbate the nation’s economic plight.

But why did investors want the yen when Japan’s economy had been hit by such a calamity?

There are a number of reasons, all of which, to varying degrees, remain pertinent.