(Bloomberg) -- Don’t write off the yen as a haven.
It’s true that Japan’s currency has failed to break out of a relatively narrow range against the dollar in recent years -- despite a trade war, tensions in the Middle East and North Korea, Brexit and now a deadly viral outbreak.
But a close examination of price moves, capital flows and Japan’s overseas investments shows that the yen still offers a safe harbor in times of trouble.
While it has climbed just 2.5% versus the greenback since the start of 2018, the yen has jumped 12% against a wider basket of its Group-of-10 peers.
Japan has maintained its status as the world’s biggest holder of foreign assets. In times of great domestic crisis, like the earthquake and tsunami of 2011, the yen can surge rather than slump as investors bring money home to rebuild.
“The dollar’s resilience is masking the yen’s appreciation in times of risk aversion,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “There is no change to the yen’s low-risk nature.”
But the changing composition of Japan’s current-account surplus does mean that less money is being repatriated on a regular basis, reducing some of the upward pressure on the currency.
The nation’s trade balance has dwindled in recent years while financial investments abroad have climbed and manufacturers have set up more factories overseas. Unlike exporters, who typically buy yen to bring their earnings back to Japan, money tied up in factories and offshore investments stays put longer.
A steady stream of international acquisitions by Japanese companies has bolstered this trend.
Japanese investors hunting for higher-yielding foreign securities have also taken advantage of bouts of yen strength, capping gains. Portfolio flow data show that pension funds acquired a record amount of overseas bonds in January.
“Income from overseas investments in principle doesn’t come back to Japan,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. Along with dollar strength, this has contributed to the yen trading in a “stale” range, leading some traders to mistakenly question its haven status, according to Ishizuki.
The yen has traded between 105 and 112 against the dollar in the past year. It fluctuated more against the euro over the same period, moving between 116 to 128.
A correlation between moves in the yen and U.S. stocks also adds weight to the view about the currency’s value as a hedge against risk. Whenever American equities begin moving wildly, the yen tends to get bought as a haven.
Leverage funds have also cut their bearish bets on the yen to around the least since October last year, according to CFTC data.
“It would be difficult to see the yen sold on risk-off,” said NLI’s Ueno. “The yen’s status as a haven currency remains structurally intact.”
(Updates with CFTC data on yen bets)