Economics
Chief economist update: The hazard of being a safe haven

We're now all too familiar with the heightened volatility in financial markets; the slowdown in global economic growth, led by rising expectations for a US recession (and perhaps, Germany); the trade war - US and China, Japan and South Korea; Brexit; political uncertainty (in Hong Kong, in Italy, in Russia and in Argentina).

These mounting uncertainties have pushed investors into safe haven assets such as longer-term bonds and currencies like the Swiss franc and the Japanese yen.

Ahh yes, the Japanese yen - except for its mini-me trade war with South Korea, where both countries deleted each other from their preferred trading lists - the "Land of the Rising Sun" had been absent from the headlines.

The last headline news out of Japan was when the Bank of Japan (BOJ) conducted its monetary policy meeting on July 30, deciding to keep the status quo - interest rate at -0.1% and 10-year government bond yield target at around 0% - and vowed to "maintain the current extremely low levels of short and long-term interest rates for an extended period of time, at least through around spring 2020" while at the same time stating that: "The bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost".

That was printed on July 30, before Trump ramped up his tariff war with China (on August 1) and before all the other uncertainties mentioned above (and then some) escalated and blew a strong tailwind into the Japanese yen's sails.

So much so, that since the BOJ's last board meeting, the Japanese currency has appreciated by 2.2% to ¥106.28 versus an appreciating US dollar (+0.3% since and +2.1 ytd, based on Bloomberg's US dollar spot index). The ¥/US$ exchange rate is up 2.8% this year to date.

The negative correlation between the Japanese yen and the Nikkei-225 index makes the 4.8% drop in the Japan's benchmark equity market index hardly surprising - one that has taken down its 2019 return from a high of 11.5% in April this year to a meagre 3.3% (still positive but nonetheless, still underperforming its peers).

Growing uncertainties - global growth, political, geo-political - will keep the Japanese yen well-bid, frustrating the Japanese central bank's efforts at lifting inflation. Already, the BOJ's small progress on core inflation has reversed.

After reaching a five-month high of 0.9% in April, Japan's annual core inflation rate decelerated to 0.8% in May and 0.6% in June. The stronger yen, for sure and for certain, would continue to not only put downward pressure on inflation but also on Japan's exports and by extension, its economic growth.

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