The Japanese YEN is about to lose its safe haven appeal, as oil inflation will hit Japan like a freight train. Could it lead to an economic crisis?
One of the most heavily Central Bank underwritten and institutionalized economies in the world is the basket case Japanese economy. A many economists have argued to reasons why it collapsed spectacularly in the 1990's, my brief analysis can be found here under this post. Either way, as a benchmark economy apparently stuck in deflation, which in a lot of ways is a fallacy, Japan is actually one of the most expensive countries in the world to not only live in, but also to travel to and spend your converted currency in.
For a very good detailed IMF report written in 2016 re: why the YEN is a safe haven/hedge, please refer to this link: https://www.imf.org/external/pubs/ft/wp/2013/wp13228.pdf
The Japanese YEN ¥, known also as a risk aversion currency has fallen the most in over a decade. Traditionally seen to be a safe haven along side the Swiss Franc, may finally lose its safe haven appeal, which in a very summarized way, was once attractive due to the lack of volatility and stability of Japan's fiscal system of the last 10 years. It short, as mentioned above, the government and the Bank of Japan have underwritten everything in Japan.
The Chart 1. above shows the 10 year spread of YEN depreciation in 2001, its rise and recent collapse in value which occurred in March 2022. It also gives one of the partial reasons that the Yen is selling off, which is the differential between Japan's negative rate policy at -0.10%, which started in 2016 and the U.S. which is now at 0.50% with a soon-to-be 0.75% rise in interest rates.
Chart 2. Shows a more compelling reason why the Yen will lose its decade long safe haven and hedge appeal, oil/energy inflation to which the Japanese central bank and government may have acted too slow to contain. Note the oil price trailing the YEN as a hedge, yet with COVID-19 reflation trades, supply chain issues, oil investments collapsing, war and widespread inflation breaking out everywhere, the oil price has now diverted away from the YEN.
Chart 3, The three top net importers of oil China/Japan/America, Japan stands at No 2 importer. With the YEN falling to 10 year lows at .0079 and the oil price at $100 pb *per barrel*, Japan could be in for a nasty bout of stagflation. Refer to Chart 2 again, which shows when the Japanese currency previous low in 2001 was .0074, at a time when the price of oil was $20 a barrel.
Times are changing.
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