The Japanese yen has been on a tear lately, gaining nearly 7% against the US dollar since early October. This rally has come as a surprise to many investors like Kavan Choksi, who had been bearish on the yen due to concerns about the country’s economy. So, is the yen a good investment right now? Let’s take a closer look.
Factors Driving the Rally
There are several factors that have contributed to the yen’s recent strength. First of all, Japan is benefitting from an increase in risk appetite among investors. This has led to flows into Japanese stocks and other riskier assets, which has, in turn, helped to drive up the value of the yen. Additionally, the Bank of Japan’s recent decision to maintain its ultra-loose monetary policy has also been supportive of the currency.
Another factor that is driving demand for the yen is safe-haven buying. With geopolitics becoming increasingly uncertain and global economic growth beginning to slow down, investors are seeking out safe havens like gold and government debt. The Japanese yen, being a low-yielding currency, typically benefits from safe-haven buying as investors seek to hold it in times of market turbulence.
Finally, the US dollar has been under pressure recently due to a combination of trade tensions and softening economic data. This has added to the yen’s gains against its American counterpart. The trade tensions between the US and China have been one of the main drivers of this market movement. The two countries have been engaged in a trade war for over a year now, and there is no end in sight. The continued tit-for-tat tariffs have led to a decrease in demand for both American and Chinese goods. In addition, the American economy has softened recently, with growth slowing and manufacturing activity contracting. This has made the dollar less attractive to investors. As a result, the yen has risen to its highest level against the dollar in over three years. While the trade war and economic slowdown are certainly not good news for America, they have created an opportunity for investors to capitalize on the yen’s strength.
Risks to Consider
Of course, no investment is without risk, and there are several factors that could weigh on the Japanese yen going forward. Firstly, if risk appetite begins to wane or if global economic growth picks up again, demand for safe havens like the yen could start to dissipate. Additionally, rising US interest rates could put downward pressure on the Japanese currency as investors seek out higher-yielding assets. Finally, it is worth noting that Japan’s economy faces significant structural challenges, such as high levels of debt and a rapidly aging population. These factors could limit any further upside potential for the yen over the long run.
Investment risks aside, the recent rally in the Japanese yen has caught many investors by surprise. However, upon closer examination, it becomes clear that there are several factors driving demand for the currency right now. From an increased appetite for risk to safe-haven buying and weakness in the US dollar, there are plenty of reasons why now might be a good time to consider investing in Japanese yen. Just remember to weigh all of the risks before making any decisions.