Japanese Prime Minister Fumio Kishida (right) with the Governor of the Bank of Japan Kazuo Ueda as new banknotes are issued and NBSP
Author: Jemima Hunter, a line writer
It can be overshadowed by the dollar or the American euro, but the yen is the third most negotiated currency in the world, which represents 13% of world exchange transactions in 2022. Confidence returns: the yen has seen hedge funds Inject nearly $ 5 billion into bullish posts. , the biggest clear position long in almost eight years. The decision of the Bank of Japan (BOJ) to increase interest rates for the first time in 17 years has finally broken its long-standing ultra-exploit monetary policies and has opened the door to a new reform.
YEN recovery expectations are increasing. In May 2024, the benefits planned in Japan increased by 4.7% over a year-the fastest wage growth since 1992. Will this strengthening the labor market sufficient to support the resumption of the Yen?
Its recent movements have been strongly influenced by geopolitical events such as the war and the tensions of Russia-Ukraine in the Asia-Pacific region. Heritage management strategies must change in accordance with the economic climate and decisions of the Central Bank, as well as our collective investment choices affect not only global economies, but the stability of companies as a whole. So how does Japan’s ability to adapt to Yen movements affect global investment opportunities as well as interior economic growth?
Understand the inheritance of the yen
The yen was born in 1872, when Japan overflowed with optimism after the restoration of Meiji, abandoning centuries of isolation and encouraging modernization. It is a currency that symbolized the identity of a newly sure nation to embrace the wider world. Initially linked to the ordeal, he underwent major changes after 1945. With the Chaos world, the 1949 Bretton Woods system provided a lifeline for desperate broken savings. As part of this new diet, the Yen was set at 360 yen at the dollar, offering security in Japan even if it has limited flexibility. Retrospectively, this balancing act reflected the resilience of the nation.
In the early 1970s, Bretton Woods collapsed while the United States abandoned the Order, and Japan let the yen float freely in 1973. The combination resulting from uncertainty and potential generated substantial movements in its value.
Geopolitical tensions, economic changes and unexpected global events can all trigger tremors in monetary values
The 1980s were turbulent for the Yen, especially because of international agreements. The Plaza 1985 agreement intended to weaken the dollar, although this sparked a chain reaction which seriously rocked the Yen. Although supported by Japan’s economic prowess, trade tensions with the United States have seen its value move to a hollow of 79.75 compared to the dollar in 1995. Unsurprisingly, the Ministry of Japan of Finance quickly started to Buy and sell YEN to stabilize its value and protect exporters from economic reprimands. .
More recently, Yen’s movements have been affected by global financial crises and changes in monetary policy, creating a difficult environment to manage future risks. As the Japanese proverb indicates, “fall seven times, eight” indicates, responding with resilience is what matters.
Over the years, the yen has illustrated this resilience, especially in uncertain times. Since the fallout from the 2008 financial crisis, when it increased to around 90.87 against the dollar, investors have presented themselves to security, to its role of paradise during the 18 -year -old pandemic, the yen made his evidence. However, its apparent stability remains vulnerable to external pressures, in particular when other nations are struggling with inflation: the uprising of 2022 in American interest rates beat the yen and expanded the yield between yield between The obligations of the Japanese and American government. This growing divergence in monetary policies has made the yen more volatile and more subject to the feeling of investors.
In September 2024, inflation in Tokyo reached the objective of two percent of the Boj, reporting a return to growth and the promise of new rate increases. However, the Yen is negotiated today at around 147.83 for the dollar – the lowest rate for decades. It is not a Blip, but part of a more important struggle for Japan, with geopolitical tensions, especially in the Asia-Pacific region, the problems of the supply chain and the decision to maintain the rates Interest near zero, all contributory factors.
A fragile position against inflation
Speculations on changes in the monetary policy of Japan suggest that yen could bounce back, but with inflation crawling up and rises global uncertainty, the situation is more precarious for consumers and decision -makers, leaving the currency exposed . The determining moment came in July 2024 when the BOJ increased its short -term policy beach from zero percent to a provisional 0.1%. Although a stronger yen can temper inflation, it can also mitigate the economy of Japan exports.
Dominic Schnider, chief of Global FX & Commodities at the UBS Global Wealth Management Investment Office, spoke with Global finance On the way UBS adjusts its strategies to manage the risks in terms of yen. Schnider stressed that the UBS approach to currency management has not changed: investors are advised to cover their exposure to G10 currencies as a starting point in the strategic allocation of assets. He explained that wherever they provided for a long -term appreciation, as in Japan, UBS opted for non -covered positions, while constantly hiding their fixed income exposure to limit the risk.
According to the index of economic complexity, Japan is the most complex economy in the world, because of its sophisticated infrastructure, its diversified export base, its advanced industrial sector and its leadership in technologies such as the electronics, robotics and car manufacturing. Nevertheless, the low interest rates of Japan, the challenges of internal inflation and total dependence on energy imports in a very volatile global market, all continue to influence the value of the yen. The widening gap between Japanese prices and those of other significant savings aroused Yen’s slide to a 24 -year -old hollow: 132 against the dollar. According to JP Morgan forecasts in 2024, the USD / JPY differential will continue to be influenced by the expectations of the American federal reserve policy, rather than by BOJ’s actions. Although BOJ’s interventions can create short -term risks, it is unlikely that they affect the main factors stimulating the depreciation of the yen. Despite the recent departure of the negative interest rate bank, the Yen remains linked to the American economy, as shown in a strong rally after a report of American CPI in March.
In this environment, wealth management strategies must remain flexible. In the opinion of Schnider, “the decision in the yen and wider implications on the market is the result of several convergent factors. First of all, we had a double surprise from the boj and slowing American economic data. Second, investors strongly pursued Japanese shares and were materially short. Finally, the JPY assessment was held to the extreme, being unbalanced with relative rates or from the point of view of the PPP. The current USD / JPY levels are more aligned with interest rate differentials. »»
Schnider’s observations underline the speed with which the market can be shaken when unexpected economic developments coincide with the positioning of investors, and although the recent yen correction can restore a certain balance, the situation remains fluid. Investors and wealth managers must therefore monitor the actions of the Central Bank in accordance with economic conditions, because developments could again disrupt the stability of money at any time.
During a discussion on the recent exchange market environment with the investment bank company, Schnider explained how CHF and JPY tend to benefit from the drop in rates, especially since these currencies are among The changes most reactive to American rates. For UBS, the Swiss Franc was their main objective. In light of the current market conditions, Schnider said: “We have played the progress of commercial transport positions via our most preferred advice in CHF. From the point of view of positioning, the speculative accounts on the term market have room to cut more CHF short positions compared to the JPY. We therefore position the CHF in our mandates at present, both compared to the USD and the CNY. »»
Long -term investment strategies
The current challenge resulting from the volatility of currencies must be met correctly for investors in order to protect their portfolios while seizing opportunities in an uncertain market. UBS has recommended three essential strategies: “First, organize a diversified portfolio, so swings in a single currency do not change the overall performance of investments. In this context, a global investor based on the USD should not have more than eight percent exposure to Japanese actions (eight percent high depending on the risk profile). A good equity and a mixture of links help, as we saw in 3q. Second, have a strategic approach on how to manage exposure to FX. This can go from completely covered covered, depending on the preference. And thirdly, have a tactical investment framework, so you can take controlled exposure when the FX dislocations emerge. Also use the options market to take playoffs at asymmetrical risk (on both sides). Even if you are a long -term investor, considering extreme positions on the currency market requires the attention of investors. “”
Yen movements were affected by global financial crises and changes in monetary policy
Although the propagation of investments through a variety of different assets can alleviate sudden currency fluctuations by allowing certain areas to absorb the effect of travel rates while others thrive, the views of Schnider managing the FX exposure as essential to maintain foreseeable yields and ensure that investors are not supported.
The real victory, however, has just found opportunities in market instability. A flexible tactical investment strategy allows investors to benefit from the evolution of conditions, which makes uncertainty to their advantage.
After all, uncertainty is the name of the game. Geopolitical tensions, economic changes and unexpected global events can all trigger tremors in monetary values. It’s about staying vigilant and proactive. Those who embrace change are better placed to protect their assets. It is the ability to adapt in a proactive way that makes the difference.