## The yen as a safe-haven: mechanisms, evidence, and policy implications

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### Introduction and motivation
- The yen is widely considered a safe haven currency that appreciates when global risk aversion rises or fundamentals are uncertain.
- Notable post-2008 episodes cited:
  - a real exchange rate appreciation by over 20 percent following the global financial crisis;
  - a 10 percent yen appreciation against the euro in May 2010 after a large jump in the VIX;
  - intra-day appreciation on February 25, 2013 of 5¼ percent against the euro and about 4 percent against the dollar amid uncertainty over Italian elections.
- Since the mid-1990s, there have been 12 episodes where the yen appreciated in nominal effective terms by 6 percent or more within one quarter.
- Puzzle motivating the analysis: large yen movements during risk-off episodes often occur without detectable movements in net capital in- or outflows.

### Definitions and empirical approach
- Risk-off episodes: days when the VIX index is 10 percentage points higher than its 60-day backward-looking moving average (De Bock and de Carvalho Filho, 2013 risk-off indicator).
- Primary empirical sample: 11 risk-off episodes since 1992 (Table 2 list of events); analysis excludes the Tohoku earthquake episode when focusing on events arguably exogenous to Japan.
- Empirical strategy:
  - Quarterly and monthly VARs and ADL models with the risk-off dummy treated as exogenous.
  - VARs typically include private flows/GDP, exchange rate measures, and GDP growth; risk-off dummy entered current and up to 4 lags.
  - Sample coverage examples:
    - quarterly VARs sample coverage: 1990Q1 to 2010Q4;
    - monthly yield-spread models: 2000M1 to 2011M2;
    - weekly derivatives positions: 05jan1993 to 15mar2011 for the yen.

### Major empirical findings: exchange rate behavior
- The yen tends to appreciate in the aftermath—first two quarters—of risk-off episodes across measures (nominal, real effective, bilateral vs. U.S. dollar).
- Quarterly VAR impulse response functions (4 lags) show statistically significant appreciation responses in the first two quarters following a risk-off shock.

### Major empirical findings: balance of payments and capital flows
- No evidence that risk-off episodes trigger sizeable Balance of Payments (BoP) financial inflows into Japan:
  - VAR analysis of gross and net BoP flows (flows scaled by previous year GDP) finds impulse responses typically statistically and economically insignificant.
  - Short-term small and statistically insignificant net outflows in foreign direct investment and aggregate portfolio investment, other investment and financial derivatives; net reserve sales positive (i.e., BoP inflow) but small.
- Portfolio decomposition:
  - Small (less than 1 percent of GDP) portfolio debt inflow in quarters when risk-off episodes start, partly offset by a portfolio equity outflow; cumulative net portfolio flows negative over 4 quarters after a risk-off.
  - Other investment (currencies and deposits) shows small net inflow cumulating to below 2 percent of GDP after 3 quarters and statistically insignificant afterwards.
  - Net disposals of foreign currencies and deposits by Japanese residents are a key driver of other investment inflows.
- Conclusion: appreciations do not coincide with detectable net capital inflows in official BoP statistics, unlike the Swiss experience.

### Major empirical findings: interest rate differentials
- Yield differentials between yen and U.S. dollar denominated assets tend to rise after risk-off episodes for both short and long rate spreads.
- Long rate spreads between yen and U.S. dollar widen on average more than spreads of several other advanced economy currencies (Swedish kroner, UK pound, Swiss franc, Australian dollar, euro).
- Short-term spreads show less distinctive differences; example: Australian short rate spread over the U.S. dollar tends to increase by about as much as the yen spread, which calls into question whether changes in expected monetary policy stance alone drive yen risk-off appreciations.

### Major empirical findings: derivatives and non-commercial positions
- Changes in derivatives positions are closely correlated with the yen/dollar exchange rate.
- CFTC/CME non-commercial positions:
  - Risk-off episodes trigger increases in the non-commercial net long position in the yen, mostly via reductions in short positions.
  - Twelve weeks after a VIX spike, non-commercial positions on the yen are 20 billion U.S. dollars net longer than otherwise.
  - Contextual figures:
    - average gross long non-commercial positions in the yen since 2000 are a little over 32 billion U.S. dollars;
    - the standard deviation of net non-commercial positions over the same period is about 43 billion U.S. dollars.
- Implication: portfolio rebalancing via offshore derivatives (forwards, swaps, options) appears contemporaneous with yen risk-off appreciations; such activity may reflect hedging by exporters/affiliates, long-yen positions by holders of foreign securities, or speculative positioning.

### Interpretations and mechanisms
- Four non-exclusive proximate causes explored:
  1. Massive financial inflows recorded in BoP (retrenchment by residents and capital flight by non-residents): empirical evidence does not support this for Japan.
  2. Spikes in the VIX signal future monetary policy stance leading to widening yield differentials: evidence shows spreads widen after risk-off episodes, but similar patterns for currencies that depreciate in risk-off (e.g., Australian dollar) weaken this hypothesis as a sole explanation.
  3. Portfolio rebalancing via derivatives markets not fully captured in BoP: supported by observed increases in net non-commercial long yen positions.
  4. Reassessment of expected returns in yen assets leading to price adjustments with little or no transactions: remains a plausible channel.
- Offshore and onshore transactions among residents or non-residents could also drive appreciation without appearing in BoP statistics.

### Recent yen depreciation (Abenomics) as illustration
- Japan adopted “Three Arrows of Abenomics”: flexible fiscal policy, aggressive monetary easing, and structural reforms; immediate measures included:
  - a 2 percent inflation target;
  - open-ended asset purchases;
  - fiscal stimulus amounting to about 1½ percent of GDP in effective terms in FY 2013-14.
- Between July 2012 and September 2013, the yen depreciated by close to 30 percent in effective terms.
- During the depreciation episode:
  - Net capital inflows in the BoP were not substantial; outward FDIs continued.
  - Japanese investors sold off foreign assets during the 2012-13 depreciation.
  - Foreign inflows into Japanese equities increased but currency risk was often hedged by selling yen forwards.
  - Derivatives activity shifted from net long to net short positions from October 2012 onwards.
  - Foreign exchange swaps account for about 35-40 percent of daily yen trading; many yen transactions are offshore while about two-thirds are conducted onshore.

### Policy implications and conclusions
- The yen functions as a safe-haven currency, but mechanisms differ from other safe-haven currencies (e.g., Swiss franc).
- For Japan, risk-off appreciations appear unrelated to BoP-recorded capital inflows and are not convincingly explained solely by interest-rate differential expectations; portfolio rebalancing through offshore derivative transactions is a prominent correlate.
- Policy relevance:
  - If risk-off appreciations are temporary, they impose adjustment costs and potential economic dislocation when exchange rates revert.
  - If persistent, they can foster vulnerabilities in private or public balance sheets.
  - Measures targeting capital flow volatility or coordinated monetary policies may not reduce exchange rate volatility if offshore derivative activity or belief-driven price adjustments are key drivers.
  - Broader data coverage—including offshore and derivatives exposures—may be necessary to assess cross-border interconnectedness and spillovers.
- Research gaps noted:
  - whether derivatives-driven appreciation requires subsequent real-money flows to be sustained;
  - the role of resident-on-resident or non-resident-on-non-resident transactions not captured in BoP statistics.

*Source: IMF Working Paper _wp13228 - References (excerpts: Introduction through Conclusions and Figures/Tables inclusive).*

### References .............................................................................................................

### The yen as a safe-haven: mechanisms, evidence, and policy implications

### Introduction and motivation
- The yen is widely considered a safe haven currency that appreciates when global risk aversion rises or fundamentals are uncertain.
- Since 2008, notable episodes of yen appreciation include:
  - a real exchange rate appreciation by over 20 percent following the global financial crisis;
  - a 10 percent yen appreciation against the euro in May 2010 after a large jump in the VIX;
  - intra-day appreciation on February 25, 2013 of 5¼ percent against the euro and about 4 percent against the dollar amid uncertainty over Italian elections.
- Since the mid-1990s, there have been 12 episodes where the yen appreciated in nominal effective terms by 6 percent or more within one quarter.
- Puzzle motivating the analysis: large yen movements during risk-off episodes often occur without detectable movements in net capital in- or outflows.

### Definitions and empirical approach
- Risk-off episodes identified using the De Bock and de Carvalho Filho (2013) risk-off indicator: days when the VIX index is 10 percentage points higher than its 60-day backward-looking moving average.
- Under this definition, 11 risk-off episodes since 1992 are used in the primary empirical sample (Table 2 list of events; the analysis excludes the Tohoku earthquake episode when focusing on events arguably exogenous to Japan).
- Empirical strategy:
  - Quarterly and monthly VARs and ADL models with the risk-off dummy treated as exogenous.
  - VARs typically include private flows/GDP, exchange rate measures, and GDP growth; risk-off dummy entered current and up to 4 lags.
  - Sample coverage cited: e.g., quarterly VARs sample coverage goes from 1990Q1 to 2010Q4; monthly yield-spread models cover 2000M1 to 2011M2; weekly derivatives positions cover 05jan1993 to 15mar2011 for the yen.

### Major empirical findings: exchange rate behavior
- The yen tends to appreciate in the aftermath—first two quarters—of risk-off episodes across measures (nominal, real effective, bilateral vs. U.S. dollar).
- Impulse response functions from quarterly VARs (4 lags) show statistically significant appreciation responses in the first two quarters following a risk-off shock.

### Major empirical findings: balance of payments and capital flows
- No evidence that risk-off episodes trigger sizeable Balance of Payments (BoP) financial inflows into Japan:
  - VAR analysis of gross and net BoP flows (flows scaled by previous year GDP) finds impulse responses typically statistically and economically insignificant.
  - Short-term small and statistically insignificant net outflows in foreign direct investment and aggregate portfolio investment, other investment and financial derivatives; net reserve sales positive (i.e., BoP inflow) but small.
- Portfolio decomposition:
  - Small (less than 1 percent of GDP) portfolio debt inflow in quarters when risk-off episodes start, partly offset by a portfolio equity outflow; cumulative net portfolio flows negative over 4 quarters after a risk-off.
  - Other investment (currencies and deposits) shows small net inflow cumulating to below 2 percent of GDP after 3 quarters and statistically insignificant afterwards.
  - Net disposals of foreign currencies and deposits by Japanese residents are a key driver of other investment inflows.
- Conclusion: appreciations do not coincide with detectable net capital inflows in official BoP statistics, unlike the Swiss experience.

### Major empirical findings: interest rate differentials
- Yield differentials between yen and U.S. dollar denominated assets tend to rise after risk-off episodes for both short and long rate spreads.
- Long rate spreads between yen and U.S. dollar widen on average more than spreads of several other advanced economy currencies (Swedish kroner, UK pound, Swiss franc, Australian dollar, euro).
- Short-term spreads show less distinctive differences; e.g., Australian short rate spread over the U.S. dollar tends to increase by about as much as the yen spread, calling into question whether changes in expected monetary policy stance alone drive yen risk-off appreciations.

### Major empirical findings: derivatives and non-commercial positions
- Changes in derivatives positions are closely correlated with the yen/dollar exchange rate.
- CFTC/CME non-commercial positions:
  - Risk-off episodes trigger increases in the non-commercial net long position in the yen, mostly via reductions in short positions.
  - Twelve weeks after a VIX spike, non-commercial positions on the yen are 20 billion U.S. dollars net longer than otherwise.
  - Context: average gross long non-commercial positions in the yen since 2000 are a little over 32 billion U.S. dollars; the standard deviation of net non-commercial positions over the same period is about 43 billion U.S. dollars.
- Implication: portfolio rebalancing via offshore derivatives (forwards, swaps, options) appears contemporaneous with yen risk-off appreciations; such activity may reflect hedging by exporters/affiliates, long-yen positions by holders of foreign securities, or speculative positioning.

### Interpretations and mechanisms
- Four non-exclusive proximate causes explored:
  1. Massive financial inflows recorded in BoP (retrenchment by residents and capital flight by non-residents): empirical evidence does not support this for Japan.
  2. Spikes in the VIX signal future monetary policy stance leading to widening yield differentials: evidence shows spreads widen after risk-off episodes, but similar patterns for currencies that depreciate in risk-off (e.g., Australian dollar) weaken this hypothesis as a sole explanation.
  3. Portfolio rebalancing via derivatives markets not fully captured in BoP: supported by observed increases in net non-commercial long yen positions.
  4. Reassessment of expected returns in yen assets leading to price adjustments with little or no transactions: remains a plausible channel.
- Offshore and onshore transactions among residents or non-residents could also drive appreciation without appearing in BoP statistics.

### Recent yen depreciation (Abenomics) as illustration
- Japan adopted “Three Arrows of Abenomics”: flexible fiscal policy, aggressive monetary easing, and structural reforms; immediate measures included:
  - a 2 percent inflation target;
  - open-ended asset purchases;
  - fiscal stimulus amounting to about 1½ percent of GDP in effective terms in FY 2013-14.
- Between July 2012 and September 2013, the yen depreciated by close to 30 percent in effective terms.
- During the depreciation episode:
  - Net capital inflows in the BoP were not substantial; outward FDIs continued.
  - Japanese investors sold off foreign assets during the 2012-13 depreciation.
  - Foreign inflows into Japanese equities increased but currency risk was often hedged by selling yen forwards.
  - Derivatives activity shifted from net long to net short positions from October 2012 onwards.
  - Foreign exchange swaps account for about 35-40 percent of daily yen trading (similar to other key currencies); many yen transactions are offshore while about two-thirds are conducted onshore.

### Policy implications and conclusions
- The yen functions as a safe-haven currency, but mechanisms differ from other safe-haven currencies (e.g., Swiss franc).
- For Japan, risk-off appreciations appear unrelated to BoP-recorded capital inflows and are not convincingly explained solely by interest-rate differential expectations; portfolio rebalancing through offshore derivative transactions is a prominent correlate.
- Policy relevance:
  - If risk-off appreciations are temporary, they impose adjustment costs and potential economic dislocation when exchange rates revert.
  - If persistent, they can foster vulnerabilities in private or public balance sheets.
  - Measures targeting capital flow volatility or coordinated monetary policies may not reduce exchange rate volatility if offshore derivative activity or belief-driven price adjustments are key drivers.
  - Broader data coverage—including offshore and derivatives exposures—may be necessary to assess cross-border interconnectedness and spillovers.
- Research gaps noted: whether derivatives-driven appreciation requires subsequent real-money flows to be sustained; the role of resident-on-resident or non-resident-on-non-resident transactions not captured in BoP statistics.

*Source: IMF Working Paper _wp13228 - References (excerpts: Introduction through Conclusions and Figures/Tables inclusive).*

### REFERENCES

### _wp13228 - REFERENCES

### References

- Bekaert, Geert and Marie Hoerova and Marco Lo Duca, 2010, “Risk, Uncertainty and Monetary Policy,” NBER Working Paper 16397.
- Bluedorn, John, Rupa Duttagupta, Jaime Guajardo and Petia Topalova, 2013, “Capital Flows Are Fickle: Anytime, Anywhere,” mimeo.
- Broner, Fernando, Tatiana Didier, Aitor Erce and Sergio L. Schmukler, 2013, “Gross Capital Flows: Dynamics and Crises,” Journal of Monetary Economics 60: 113-133.
- Bussière, Matthieu, Claude Lopez and Cédric Tille, 2013, “Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth?” MPRA Paper No. 44096.
- Carrière-Swallow, Yan and Pablo García-Silva, 2013, “Capital Account Policies in Chile: Macro-financial Considerations Along the Path to Liberalization,” IMF Working Paper 13/107.
- De Bock, Reinout and Irineu de Carvalho Filho, 2013, “The Behavior of Currencies during Risk-off Episodes,” IMF Working Paper 13/08.
- de Carvalho Filho, Irineu, 2013, “Risk-off Episodes and Swiss Franc Appreciation: the Role of Capital Flows,” mimeo.
- Dwor-Frécaut, Dominique 2008, “Korea’s Money Market”, in: Korea’s Economy 2008, Korea Economic Institute and Korea Institute for International Economic Policy, page 27-29.
- Forbes, Kristin and Frank Warnock, 2012, “Capital Flow Waves: Surges, Stops, Flight and Retrenchment,” Journal of International Economics 88(2), 235–251.
- Habib, Maurizio M., Livio Stracca, 2012, “Getting Beyond Carry Trade: What Makes a Safe Haven Currency?” Journal of International Economics, 87(1): 50-64.
- International Monetary Fund, 2004, “Debt-Related Vulnerabilities and Financial Crises—An Application of the Balance Sheet Approach to Emerging Market Countries,” mimeo, http://www.imf.org/external/np/pdr/bal/2004/eng/070104.htm
- International Monetary Fund, 2011, “International Capital Flows: Reliable or Fickle?” World Economic Outlook, April, Chapter 4, pp. 125-63.
- International Monetary Fund, 2012, “Switzerland: Selected Issues Paper,” IMF Country Report 12/107.
- International Monetary Fund, 2012b, “Iceland: Ex Post Evaluation of Exceptional Access Under the 2008 Stand-by Arrangement,” IMF Country Report 12/91.
- Ito, Takatoshi, 2007, “Myths and Reality of Foreign Exchange Interventions: An Application to Japan,” International Journal of Finance and Economics, 12: 133-154.
- Milesi-Ferretti, Gian-Maria and Cédric Tille, 2011, “The Great Retrenchment: International Capital Flows during the Financial Crisis,” Economic Policy vol. 26, issue 66: 289-346.
- Ranaldo, Angelo and Paul Söderlind, 2010, “Safe Haven Currencies,” Review of Finance 14(3): 385-407.
- Sorsa, Piritta, Bas B. Bakker, Christoph Duenwald, Andrea M. Maechler, and Andrew Tiffin, 2007, “Vulnerabilities in Emerging Southeastern Europe—How Much Cause for Concern?” IMF Working Paper 07/236.

*Source: _wp13228 - REFERENCES*

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