Neal Kimberley

Macroscope | Why the Japanese yen rally may not last even if worries over the Covid-19 variant Omicron persist

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The yen’s safe-haven status explains why investors favour it in times of uncertainty, but greed tends to conquer fear in markets

The interest rate differential against Japan’s currency, which increases the cost of holding yen, and the continuing weakness of the Japanese economy will reassert themselves

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People walk along a street full of shops, bars and restaurants in Shibuya, Tokyo, on October 1. For investors to hold on to the yen in favour of the US dollar and other currencies, they will need to be persuaded that the economic outlook for Japan is better than for those other economies, and that’s a hard argument to make. Photo: AP

Neal Kimberley

Published: 2:30pm, 30 Nov 2021

The Japanese yen rallied late last week after South African scientists identified a new and potentially very problematic variant of Covid-19. This was an understandable reaction from a foreign exchange market that has long accorded Japan’s currency “safe-haven” status in times of global trouble but the yen’s bounce may prove short-lived.

Knee-jerk market reactions to news of the emergence of the Omicron variant, as it was designated by the World Health Organization on Friday, can be characterised as “risk-off”. This is where market participants move to unwind exposures seen as vulnerable in light of new information and instead acquire assets and currencies seen as safe havens, such as the yen.

But, in markets, greed ultimately tends to conquer fear, a process that can often occur quite quickly. Logical risk-off responses to bad news may themselves then have to be unwound, and at speed.

As regards the foreign exchanges, the current situation is no different to previous bouts of risk aversion. The switch from a risk-on to a risk-off stance necessarily encompasses a move into safe-haven currencies.

A financial board is displayed in Tokyo’s Yaesu area on November 17. The yen rallied late last week as investors switched from a risk-on stance to a risk-off position on news of the Omicron Covid-19 variant. Photo: Kyodo

It is often those very safe havens that the foreign exchanges, in a prior optimistic frame of mind, had previously shorted in favour of alternatives that were perceived as being better bets.