The yen’s reputation as a haven has taken a heavy blow as the currency sold off sharply against a backdrop of a weakening economy and the deadly coronavirus epidemic.
In overnight trading the yen dropped as much as 1.4 per cent to a near nine-month low of ¥111 to the dollar. Traders said the move had been driven by non-Japanese institutions trading in London and New York hours.
The fall represents a departure from a pattern in recent years whereby the yen strengthens whenever unsettling news prompts investors to sell riskier assets.
That change could reflect pessimism about the outlook for Japan, with dismal economic data and the spread of coronavirus leading to strong investment outflows from domestic institutions.
“There were a lot of big investors who had been holding yen positions as a hedge and as it headed below ¥110 [to the dollar] those started to unwind,” said Mansoor Mohi-Uddin, a foreign exchange strategist at NatWest Markets.
Mr Mohi-Uddin said that markets were likely worried about Japan’s economy, particularly given the spread of the coronavirus. The latest trade data suggested Japan would continue to run deficits, which could push the yen lower in the long-term.
Earlier this week Japanese GDP data showed that the economy shrank by an annualised 6.3 per cent in the final quarter of 2019. That was worse than analysts’ forecasts and puts the world’s third-biggest economy on course for a technical recession, or two consecutive quarters of negative growth.
That economic weakness increases the likelihood of Japan’s central banking further easing monetary policy, which would risk pushing the yen even lower.
The yen has mainly traded in a range of ¥105-115 per dollar over the past three years. In 2016, it rallied from ¥120 to ¥100 over concerns about the global outlook, illustrating its haven function.
But the pattern of yen strength on bad news has weakened over the past 18 months, partly due to large investment outflows from Japan. Japanese companies have increasingly made overseas acquisitions, while the Government Pension Investment Fund — the world’s biggest pension investor — has invested more money into foreign bonds.
Data from the Ministry of Finance showed that Japanese trust accounts made a record ¥2tn ($18bn) in net acquisitions of foreign bonds in January.
“Underlying the yen’s recent move is market expectations of the GPIF’s update on its portfolio balancing before the end of the fiscal year,” said Shusuke Yamada, a strategist at Bank of America in Tokyo.
Mr Yamada said there was speculation other pension funds were rebalancing their portfolios ahead of a potential GPIF move to further increase its weighting to foreign bonds.
The GPIF has shifted more assets overseas in recent years in an effort to boost returns. Japanese banks, insurers and pension funds have followed suit.
Not all analysts agreed on what prompted the yen’s latest ructions. Nomura currency strategist Yujiro Goto said it could indicate investors are not fleeing risks at present, with US stock markets trading at all-time highs and a slowdown in new coronavirus infections in China.