Despite wild swings this year, the Japanese yen's safe-haven status remains intact.

• In 2024, the yen experienced significant fluctuations, with the currency weakening in June to its lowest point since 1986, prompting the Bank of Japan to intervene.
• In three weeks, the yen strengthened by over 12% against the dollar, going from 161.99 on July 3 to 141.66 on Aug. 5 as the BOJ raised interest rates.

Despite the wild swings in the currency this year, Japan's status as a safe-haven asset is still intact, according to analysts.

In 2024, the yen experienced significant fluctuations, with the currency weakening to its lowest point since 1986. This prompted the Bank of Japan to intervene in July to stabilize the currency. The BOJ had previously intervened in May to support the yen when it had fallen to 160 against the U.S. dollar.

In August, following the BOJ's decision to raise rates in July, Japan's stock market and currency experienced significant fluctuations. The Nikkei recorded its largest one-day loss since 1987 on August 2 as the yen strengthened dramatically.

Despite fluctuations in the Japanese yen, analysts believe its safe-haven status remains secure due to its predictability.

Japan's position as the world's largest external creditor and its sustainable current account surplus and inflation make it a safe haven, according to Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation.

According to Hugh Chung, the chief investment advisory officer at wealth and fund platform Endowus, the currency strengthens consistently when U.S. bond yields and equities decline simultaneously, as seen during the 2008 financial crisis and the 2020 Covid-19 market crash.

During periods of risk-off sentiment, the yen tends to weaken against the greenback if U.S. yields rise while equities fall, as Chung pointed out, citing the development in 2022 when the U.S. Federal Reserve raised rates to combat inflation.

The significant fluctuation in the yen this year is due to the substantial disparity between the 10-year Japanese government bond yield and the 10-year U.S. Treasury yield, with the former being close to 1% and the latter being nearly 4%.

On March 18, the BOJ abandoned its yield curve control policy, with the 10-year JGB yield at 0.796% and the 10-year Treasury yield at 4.304% on March 16, the last trading day before the announcement.

The "carry trade" results from borrowing cheaply in yen to invest in higher yielding assets due to the interest rate differential.

The strengthening of the yen against the dollar occurred after the Bank of Japan raised interest rates, resulting in a gain of over 12% in three weeks, from 161.99 to 141.66 on Aug. 5. This prompted investors to unwind the "carry trade."

During a growth scare, the yen will remain a safe-haven asset, according to Chung, who stated that it has not lost its characteristic of being sensitive to U.S. interest rates.

Is the BOJ to blame?

Abe, from SMBC, stated that the fluctuations in yen are due to external market conditions rather than internal factors within Japan.

The primary reason for the high volatility observed in August was "excessive anxiety" about the possibility of the U.S. entering a recession following the release of higher-than-anticipated unemployment figures and lower-than-expected job growth.

Although I acknowledge the influence of the BOJ's surprise rate hike in July, it was only 15 basis points, and the initial response to the BOJ's decision was mixed, he stated.

Abe stated that if the BOJ's decision had caused the market reactions, they would have been much stronger. He also said that the yen should have been bought back immediately after the BOJ's decision, but that did not happen.

The BOJ made an announcement about its decision during the trading session on July 31, but the yen only experienced significant movement during the trading sessions on Aug. 2 and Aug. 5.

Yen forecast

This year, Abe predicts that the yen will exchange for approximately 145 dollars. The further strengthening of the yen will depend on the rate cuts from the Fed, which he considers "crucially important."

By the end of 2025, he anticipates the currency to weaken to approximately 130 against the dollar, with "some high volatility."

The BOJ's monetary policy moves may cause volatility, but Abe does not anticipate any rate hikes "at this time."

Although he doesn't completely dismiss the possibility of a rate hike by the central bank, he acknowledges that the stronger-than-expected recovery in private consumption during the second quarter could strengthen the argument for a hike.

The volatility of the yen may have reached its peak this year due to the partial unwinding of the 'carry trade' and the central banks' actions being less of a surprise to the markets, according to Chung.

The growth outlook of the U.S. economy will likely determine the yen's future direction, as agreed upon by two experts.