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

IMF Working Papers, November 6, 2013

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

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Bibliographic details

• Authors: Dennis P Botman, Irineu E de Carvalho Filho, Waikei R Lam
• Published: November 6, 2013
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475513424.001

Summary and central finding

• During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar.
• The proximate causes of yen risk-off appreciations are investigated.
• Neither capital inflows nor expectations of the future monetary policy stance can explain the yen’s safe haven behavior.
• Changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows.
• Risk-off episodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen.

Empirical findings and mechanisms

• No explanatory role found for capital inflows in yen risk-off appreciations.
• No explanatory role found for expectations of future monetary policy stance.
• Evidence points to derivatives trading as the transmission from risk perception changes to spot exchange rate moves, operating without associated capital flows.
• Specific derivatives-market behaviors observed during risk-off episodes:
  • Forward hedging.
  • Reduced net short positions in yen.
  • Buildup of net long positions in yen.

Policy implications and recommendations

• Offshore and complex financial transactions should be part of spillover analyses.
• The effectiveness of capital flow management measures might be limited in certain cases when derivatives-driven moves dominate.
• Monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases when the mechanism is derivatives trading rather than capital flows.

Subjects and keywords

• Subjects: Balance of payments statistics, Currencies, Currency markets, Exchange rates, Financial markets, Foreign exchange, Money, Real exchange rates
• Keywords: appreciation, Capital Flows, Currencies, Currency markets, Derivatives, derivatives markets transaction, exchange rate, Exchange rates, FX derivatives market, Global, Real exchange rates, risk-off appreciation, Safe Haven, safe haven status, WP, yen, yen appreciation, Yen Volatility

Content in this bundle

• The yen as a safe-haven: mechanisms, evidence, and policy implications
  • The yen as a safe-haven: mechanisms, evidence, and policy implications (Markdown version)
  • The yen as a safe-haven: mechanisms, evidence, and policy implications (PDF)