Column-That rare crisis, when the yen falls: McGeever By Reuters

By Jamie McGeever

ORLANDO, Fla. (Reuters) – In times of crisis, not much in financial markets roars “safe haven” louder than the Japanese yen.

But in the three weeks of market turmoil since Russia invaded Ukraine, the yen has whimpered its way to a five-year low against the dollar. This time really is different.

The characteristics that usually lay the foundations for yen strength in times of global market upheaval – falling interest rates and commodities prices against the backdrop of a sizeable Japanese current account surplus – are not in place.

Worse still for the yen, these forces are working in reverse: global interest rates, led by expectations for the Fed, are marching higher; energy and commodities prices are soaring; and Japan’s current account surplus is small and evaporating.

Currency analysts at HSBC hold their hands up and acknowledge they underestimated the nature of the market shock following the Feb. 24 invasion. Instead of the “typical risk-aversion play” propelling countercyclical currencies like the yen, “currencies of most commodity exporters have performed well in contrast to those of net commodity importers.”

And there are few major economies more reliant on imported energy than Japan.

Graphic: Japan Energy Costs & Yen- https://fingfx.thomsonreuters.com/gfx/mkt/zdvxokbgopx/YENENERGY.jpg

Most of Japan’s primary energy needs are met by , more than 90% of which comes from the Middle East. Japan is also one of the world’s biggest importers of liquefied , which accounts for around a quarter of its energy mix.

rocketed towards $140 a barrel earlier this month from around $90 before the war started, although it has fallen back below $100/bbl. Asia LNG spot prices have risen almost 20-fold from pre-pandemic levels.

This marks a sharp deterioration in the country’s terms of trade, and the yen-boosting current account surplus that Japan has mostly run for decades could soon become a deficit.

“This is an unusual crisis. U.S. interest rates are going up rather than down, oil is going up rather than down. And terms of trade are going against Japan,” said Alan Ruskin, macro strategist at Deutsche Bank (DE:).

Graphic: Japan Export & Import Prices- https://fingfx.thomsonreuters.com/gfx/mkt/zgvomzxynvd/JapanTermsofTrade.jpg

SAFE HAVEN NO MORE

Ruskin has been watching global FX markets for 40 years. Most major financial shocks in that time – the first Gulf War in 1990, Russia’s default and near collapse of hedge fund LTCM in 1998, the Great Financial Crisis of 2007-09, the COVID-19 pandemic in 2020 – have triggered immense yen rallies.

This is because domestic investors suddenly repatriate some of the overseas holdings they have built up in calmer times on the back of Japan’s huge current account surplus. Home bias from one of the world’s biggest investor…