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18.10.2019 10:25 AM
Does the snail leave the shell? The yen, a protective asset, will be at risk

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For a long time, the Japanese currency was perceived by the market as a "safe haven" as a protective asset along with gold. Many investors prefer to invest in the yen, and the result justifies itself. However, if the new strategy of the Japanese government is implemented, the situation may change, experts are sure.

The initiative of the authorities of the Land of the Rising Sun concerns foreign investment, or rather, the new rules for managing foreign investment. Thus, it raises serious concerns among bankers and investors who claim the apocalyptic effects of innovation. Amendments by the Japanese authorities to the Foreign Currency and Foreign Trade Law are ambiguous, analysts say. In addition, new draconian measures against foreign investment could hit Japanese stocks hard, experts warn.

The catalyst for this initiative was the confidence of the Ministry of Economy, Trade and Industry of Japan, as well as the Ministry of Finance that the country needs to tighten the rules for foreign investment in risky sectors of the economy, including aviation, software and agriculture. At present, foreign investors investing in such companies must notify the government if they intend to acquire a share of 10% of the shares. The new rules provide for a reduction in the potential share of ownership from 10% to 1%.

Moreover, economists believe that new advance notice of commitment may exceed all resources available to the Japanese government. This situation can provoke a panic in the market, as many parties to this process will face unpredictable consequences.

Most experts claim the effect of the "cold shower" in relation to the activity of large shareholders. They recall that, thanks to foreign investors, Japan has enjoyed five years of corporate governance progress. Many analysts fear that the new initiative will block the flow of foreign investment in the Japanese securities market. It can be noted that at the moment, foreigners are holders of about 30% of Japanese shares.

The paradox is that the Land of the Rising Sun seems to use double standards. For example, the Japan State Pension Investment Fund (GPIF) continues to buy foreign assets. According to economists, this puts strong pressure on the Japanese currency, but this fact does not bother the Japanese authorities. Two days ago, experts recorded a decrease in the yen by 1.18%. Its rate has been declining over the past week. On Wednesday, October 16, the pair USD / JPY was trading near the level of 108.75.

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According to experts, thanks to large-scale investments by GPIF in foreign assets, the Japanese authorities may not have to conduct foreign exchange interventions, which suits the Donald Trump administration. However, the fall in US securities may cause a marked appreciation of the yen, analysts are sure. In such a situation, Japanese investors will begin to actively get rid of American assets and return their capital to their homeland.

According to estimates of Goldman Sachs currency strategists, the rate on the growth of the yen against the US dollar remains the most attractive trading strategy until the end of 2019. In many ways, the protective status of the Japanese currency and its positioning as an inexpensive hedging instrument contribute to this.

Global risks, which include a potential slowdown in the global economy and the difficult situation around Brexit, negatively affect the dynamics of the currency of the Land of the Rising Sun. On Thursday, October 17, the improvement in the news background associated with negotiations on Britain's exit from the EU provoked a significant reduction in the yen. Yesterday, the pair USD / JPY was trading at the level of 108.66, and so far, it is moving downward.

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Over the current week, experts recorded a slight pullback of the USD / JPY pair. According to experts, if the Bank of Japan softens its monetary policy and takes other measures, which include the initiative with foreign investments, we should expect a deep correction of the pair to 108.00. On the morning of Friday, October 18, the pair declined to 108.57–108.59, demonstrating unusual volatility.

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At the moment, the pair USD / JPY is in the consolidation range of 108.67–108.69, holding the balance. The Japanese currency has regained its equanimity, seeking to become the mistress of the situation.

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In conclusion, further dynamics of the currency of the Land of the Rising Sun will depend on a number of factors. As a result of investment manipulations by the authorities, the status of the yen as an asset of the "safe haven" will be called into question, experts say. The Japanese currency, which stands firmly on its feet and protects the capital of investors, can lose ground. Therefore, the exit of the yen from the protection zone will ensure that it enters the risk zone, analysts warn. In the event of such a scenario, it may lose its advantages as a safe haven currency and a cheap hedging instrument.

Larisa Kolesnikova,
Analytical expert of InstaForex
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