The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis

22 Pages Posted: 10 Dec 2013

See all articles by Dennis P. J. Botman

Dennis P. J. Botman

International Monetary Fund (IMF) - Fiscal Affairs Department

Irineu de Carvalho Filho

International Monetary Fund (IMF)

W. Raphael Lam

International Monetary Fund (IMF)

Date Written: November 2013

Abstract

During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stancecan explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-offepisodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.

Keywords: Currencies, Japan, Exchange rate appreciation, Capital flows, Monetary policy, Risk management, Safe Haven, Yen Volatility, Derivatives, foreign exchange, real exchange rate, exchange rates, exchange rate movements, currency swaps, exchange rate volatility, exchange markets, spot exchange rate, effective exchange rate, foreign exchange swaps, currency appreciation, foreign exchange market, currency risk, foreign exchange markets, capital inflows, real effective exchange rate, exchange rate appreciations, real exchange rate appreciation, alternative exchange rate, hedging, real exchange rate appreciations, foreign exchange transactions, risk aversion

Suggested Citation

Botman, Dennis P. J. and de Carvalho Filho, Irineu and Lam, W. Raphael, The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis (November 2013). IMF Working Paper No. 13/228, Available at SSRN: https://ssrn.com/abstract=2365865

Dennis P. J. Botman (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Irineu De Carvalho Filho

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

W. Raphael Lam

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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