Yen investors have reason to question haven status

The problem with the phrase “duck and cover” is that while it may be sensible survival advice, it does not particularly help investors. Nor, increasingly, does the phrase “tail risk”, in spite of its suddenly increased use in Tokyo among yen investors as prices see-sawed around ¥110 against the US dollar.

On Friday, the Japanese Prime Minister’s Office published an online illustrated three-pager providing advice in the event of a ballistic missile attack — which is a threat now routinely shoehorned into broker research as a “tail risk event” and that is perceived to have risen sharply as pugnacious rhetoric has crackled between the US and North Korea.

In keeping with recent tradition, the “safe haven” yen has strengthened steadily since mid-March as the language on Korea has become more alarming, the French elections have looked tighter and global investors have cut more risk from their portfolios. When it was around Y109/$ last week, analysts who had previously been confident in a Y118 level by mid-summer instead began seeing a yen strengthening towards Y105/$ and beyond.

Some confidence appeared to be restored on Monday, in spite of predictions that Pyongyang may test a missile or nuclear device on Tuesday. Tokyo stocks — now aligned in a way that means both exporters and financials favour a weaker yen — rallied strongly during the day as the Japanese currency went past ¥110 against the US dollar. Fair enough, argued traders: the news from the first round of the French presidential election was sufficiently benign to push images of north-east Asian conflict to the back of everyone’s mind.

But those fears are never too far away, as the nervous yen-buying at ¥110 later on Monday suggests, meaning traders face a dilemma. The yen bull case is clear that, where North Korea is concerned, any escalation on the spectrum between “jaw-jaw” and “war-war” will be risk-off/yen positive. After all, the analysts say, the yen surged after the 2011 tsunami. So trade the rhetoric, and even better the actions. But the term “tail risk” does not adequately capture the kind of geopolitical breakdown implied here, or whether a currency can still be described as a “safe haven” when it sits inside the potential sphere of crisis.