The coronavirus epidemic – and the collapse in global interest rates it has sparked – may have blown a hole in conventional market wisdom that Japan's yen strengthens during crises, triggering a warning bell for investors.
"The correlation with stocks didn't hold during the corona crisis, which is a game changer as to how everyone looks at the yen," Andreas Steno Larsen, chief global FX strategist at Nordea Markets, said.Between Jan 20 and Sept 9, the yen firmed 2% against a basket of major currencies, State Street calculates – a stark contrast with its 27% surge during the July-March 2008-09 crisis.
The yen's reputation stems from Japan's stash of foreign assets, at US$3.5 trillion , the world's largest international investment position. But it is also linked to a well established market trend - the carry trade, where low-yield currencies are borrowed and then sold for higher-yield assets overseas.
What's changed is that this year's worldwide collapse in short-term rates has eliminated the yield discount the yen has held since 1995, when Japanese benchmark rates fell to 0.5%.
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