Is the Yen a Reliable Safe Haven?

After a perfect year in 2017 (S&P 500 up every single month), equity markets are struggling.

The S&P 500 just finished down 2 months in a row (February, March) for the first time since early 2016. Meanwhile, the Japanese Yen is rising, leading all major currencies against the Dollar in 2018. Are these facts related? Can investors count on the Yen acting as a safe haven during times of equity market stress? Let’s take a look…

Currency ETFs total returns chart1

Data Source for all charts/tables herein: (Philadelphia Yen Index, S&P 500 Price Returns)

With data on the Japanese Yen going back to 1977 (Philadelphia Yen Index), we find the following:

  • The Yen has been positive 52% of the time during down months for the S&P 500. In the worst monthly declines for the S&P 500 (<-5%), the odds of a positive Yen increases slightly, moving up to 55%.
  • From a return standpoint, the Yen has performed better in down equity months than up months (+5.0% annualized vs. +0.6%) and better still during the worst down months (+9.2% annualized vs. +5.0%).

Yen performance during S&P500 regimes in 2977 to 2018 chart2

  • During the 15 worst down months since 1977, the Yen was positive 11 times (73.33%) with an average return of +1.6%.

Worst  S&P500 months in 1977 to 2018 chart3

  • During the largest equity market drawdowns, the Yen has had mixed results. In the 2007-09 bear market, the Yen performed admirably, gaining 18%. But in the prior bear market (2000-02), the Yen declined 12.8%.

Yen performance during S&P500 drawdowns in 1977 to 2018 chart4

Why the disparate performance? The Yen’s status as a safe haven has varied considerably over time, becoming more pronounced in recent years (post-2005).

Yen positive during down S&P months chart5

This is a by-product of the Yen’s oscillating correlation with the S&P 500. The Yen has at times moved in the same direction as the S&P 500 and at other times in opposite directions:

  • In the 3-year period leading up to August 2001, the correlation between the Yen and the S&P 500 hit an all-time high (0.46).
  • In the 3-year period leading up to October 2008, the correlation between the Yen and the S&P 500 hit an all-time low (-0.66).

Yen vs S&P500 rolling 3-year correlation graph6

So is the Yen a reliable safe haven?

That depends on your definition of “reliable” and whether you consider recent history to be of greater significance than the overall record. Over the full data set going back to 1977, the Yen’s record as a safe haven is only a little better than a coin flip (52% positive during down S&P 500 months). In recent years, though, that record has improved (63% positive since 2006), particularly during the most extreme down periods (79% positive in months with 3% loss or greater since 2006).

The real question, then, is whether something has fundamentally changed in recent years to warrant an expectation of this inverse relationship continuing. Have the reasons posited for the Yen’s safe haven status become more compelling (see Appendix A below)?

They certainly appear to be, with Japan’s net foreign assets increasing significantly +93% from 2005-2016) and the Bank of Japan implementing negative interest rate policy. But will they continue to be? I don’t know, but the Yen’s reliability as a safe haven depends on it.

Appendix A: Reasons Posited for Yen’s Safe Haven Status


Repatriation of foreign assets

Japan’s significant balance of net foreign assets (349 trillion Yen at the end of 2016) puts it in a unique position. During the time of equity market stress, Japanese investors tend to bring money back home, causing the Yen to appreciate as the foreign currency is converted back to Yen.

Net international investments graph6

Data Source: Ministry of Finance (Japan).

Unwinding of the Carry Trade

Japan’s interest rates are among the lowest in the world, with a central bank rate of -0.1%. In the “carry trade,” investors borrow from low-interest rate countries like Japan and invest in higher yielding/return assets abroad. During times of stress, investors are more apt to pay back these loans, converting back to Yen and driving the currency higher.

Yen interest rate graph7




Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He is a frequent contributor to Yahoo Finance and has been interviewed on CNBC, Bloomberg, and Fox Business.

You can follow Charlie on twitter here.


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