The Curious Case of the Yen as a Safe Haven Currency : A Forensic Analysis

Author/Editor:

Dennis P Botman ; Irineu E de Carvalho Filho ; Waikei R Lam

Publication Date:

November 6, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stance can explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-off episodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.

Series:

Working Paper No. 13/228

Subject:

English

Publication Date:

November 6, 2013

ISBN/ISSN:

9781475513424/1018-5941

Stock No:

WPIEA2013228

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

21

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