On April 29, the Japanese yen hit a 34-year low against the US dollar, at 160 JPY per USD, but then recovered thanks to government intervention.

In early July, the currency continued to hit a 38-year low against the USD, at 161.9 JPY per USD. This forced authorities to spend tens of billions of USD to intervene for the second time this year.

After the Bank of Japan (BOJ) decided to raise interest rates late last month, the Japanese stock market and domestic currency continued to record large fluctuations. The Nikkei 225 index on August 2 fell the most since 1987, while the Japanese yen turned around and increased sharply, to 142 JPY per USD.

The yen is famous for protecting investors during times of economic and political turmoil. So the currency's multiple sharp swings this year have raised questions about whether it is still a safe haven.

Analysts on CNBC said the yen's status remains unchanged, largely because the moves are "predictable." "We believe the yen can still be called a safe haven, as Japan is the world's largest foreign creditor. It also maintains a current account surplus and has stable inflation," said Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation. Current account deficits typically weaken currencies, while surpluses boost their value.

USD/JPY exchange rate developments over the past year. Chart: Reuters

Hugh Chung - Investment Advisory Director at Endowus Asset Management also said that this currency often increases when US bond and stock yields fall together, as in the 2008 financial crisis and the 2020 pandemic.

On the contrary, the yen tends to weaken against the US dollar if US bond yields rise, even though Wall Street falls. For example, in 2022, when the US Federal Reserve (Fed) raises interest rates to curb inflation.

Hugh Chung said that the strong fluctuations of the yen this year are due to the large difference between interest rates in the US and Japan. The US interest rate is currently around 5.25-5.5%, the European Union is 4%, while the figure in Japan is 0.25%.

Over the past few decades, as global central banks have tightened monetary policy, Japan has maintained an ultra-loose policy, making the yen an ideal target for the carry trade. This involves borrowing in a currency with a low interest rate, then selling it to buy a currency with a higher interest rate. The difference can then be saved or invested.

Carry trades weaken the yen. Conversely, when the BOJ raised interest rates in July, investors rushed to "close carry trades" on concerns that interest rates there would continue to rise, causing the yen to appreciate. Currently, each dollar is worth 144.3 yen.

Endowus's investment advisory director said the yen will not lose its sensitivity to US interest rates. He affirmed that it will remain a safe asset during periods of market concerns about growth.

Abe also explained that the yen's fluctuations are due to external changes, rather than domestic factors. The biggest factor contributing to the volatility this month, he said, was “excessive anxiety” about the possibility of the US falling into recession, after the country reported higher-than-expected unemployment figures and weaker-than-expected job growth.

“Of course, I can’t completely rule out the impact of the BOJ’s surprise rate hike in July. But it was only 15 basis points and the initial reaction to the bank’s decision was quite mixed,” he said. If the BOJ’s decision was the main factor, the market reaction would have been much stronger and the yen would have appreciated further.

The Bank of Japan’s decision was announced on July 31. But the yen only moved sharply in trading on August 2 and 5.

Abe forecasts the yen to trade around JPY145 per dollar this year. Whether the Japanese currency appreciates further will depend on the pace of the Fed’s rate cuts. The yen could rise to 138 yen by the end of next year, or even 130 yen per dollar. Volatility remains high, possibly due to the BOJ's monetary policy decision. However, Abe does not expect the bank to raise interest rates in the short term.

Hugh Chung, on the other hand, believes that the yen's volatility has peaked this year. This is because the carry trade has been partially closed and the BOJ's actions are less of a surprise to the market.

However, both experts agree that the yen's performance will depend on the growth outlook of the US economy.

Ha Thu (according to CNBC, Reuters)