The Japanese yen is considered a safe investment in times of trouble, but its proximity to North Korea paints a different picture.
Even after a North Korean missile flew through Japanese airspace, the yen remained in demand Tuesday as investors scrambled for havens amid escalating fears of conflict in East Asia.
But the yen’s go-to status as a haven asset—a position that currency has maintained in some investor minds since the early 1990s—might be shaky if the crisis graduates to a military confrontation, market participants said.
North Korea fired a test missile that flew over the northern island of Hokkaido and into the Pacific Ocean, causing Japanese Prime Minister Shinzo Abe to call it an “unprecedented threat.” The United Nations Security Council is reportedly due to meet late Tuesday to discuss the launch.
The move sparked a global stock market selloff that saw U. S. equities sink in early trade before recovering ahead of midday. Other traditional havens, including Treasurys, gold and the Swiss franc, also rallied in response.
As a neighbor to the rivals sharing the Korean Peninsula, with only the Sea of Japan between them, Japan might find itself on the front line of any military face-off between Pyongyang and the U. S. It is also home to U. S. military bases, making it a potential strategic target. Besides the physical fallout, a war would have repercussions for the Japanese economy, Kuniyuki Hirai, head of FX trading at MUFG said.
”If armed confrontation materializes in North Korea and Japan would be attacked…there is no sense that the yen would strengthen, ” he continued. “The yen may outperform the South Korean won, but the current [trading] situation might be a bit exaggerated or overestimate the yen’s strength.”
The relationship between the Japanese currency and risk aversion is based partly on Japan’s current account—a broad gauge of the country’s trade in goods and services, including employee wages and income from investments.
