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The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis
Author: Mr. Dennis P Botman, Mr. Irineu E de Carvalho Filho, and Mr. Waikei R Lam
Series:
IMF Working Papers
Volume/Issue:
Volume 2013: Issue 228
Language:
English
Publication Date:
06 Nov 2013
DOI:
https://doi.org/10.5089/9781475513424.001
ISBN:
9781475513424
ISSN:
1018-5941
Pages:
21
Keywords:
WP; yen; exchange rate; appreciation; risk-off appreciation; Safe Haven; Yen Volatility; Capital Flows; Derivatives; safe haven status; FX derivatives market; derivatives markets transaction; yen appreciation; Exchange rates; Currencies; Real exchange rates; Currency markets; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund