* Yen's spike to 7-week highs vs dollar, euro was
* Rally was off back of short covering, not new money
* BOJ's massive easing seen undermining currency
* Yen also seen hurt by erosion of long-term current account
By Lisa Twaronite and Hideyuki Sano
TOKYO, Jan 29 The yen's rise in reaction to
turmoil in emerging markets may have suggested the currency is
still viewed as a good defensive play, but closer analysis shows
it is actually losing some of its safe-haven status.
The yen has fallen as the Bank of Japan has been printing
money aggressively as part of Japan's economic stimulus
measures. There is little safety in holding a depreciating
currency, so it might seem odd that the yen still rose in the
emerging market selloff and fell when emerging markets settled.
Closer inspection, however, suggests the yen is indeed
losing some of its status as a sound defensive play and analysts
say little new positioning was taken up in the yen over this
past week in search of safety.
The yen spiked to seven-week highs against both the dollar
and the euro, as investors reacted to a wave of anxiety about
emerging markets. But the gains quickly unravelled because far
from being driven by new money, it was mainly speculators
covering their short positions - bets the yen would lose value.
"Long-term investors do not regard the yen as a safe haven.
The truth is the yen is being bought back because of position
unwinding," said Osamu Takashima, chief FX strategist at
Citigroup Global Markets in Tokyo.
Speculators' net short positions in the yen have fallen back
from their highs in recent weeks, although figures covering
Monday's yen spike, during the emerging market selloff, have yet
to be published.
Foreign exchange strategists polled by Reuters are also
bearish, expecting the yen to slide to 104 per dollar in one
month, to 106 in six months and to 110 in a year.
The yen hit a seven-week high of 101.77 against the
dollar on Monday and its gains since last Thursday, when
emerging market woes engulfed global financial markets, were 2.7
percent at most.
That is less than half the rise in May 2010, when a flash
crash on Wall Street prompted a 6.7 percent rally in the
The biggest weight dragging on the yen is the Bank of
Japan's massive quantitative easing (QE) programme, under which
it injects almost $70 billion a month into the financial system,
or the equivalent of 70 percent of new Japanese government bond
Japanese Prime Minister Shinzo Abe has said that his
so-called "Abenomics" plan to spark sustainable growth and
decisively beat the country's chronic deflation is not
explicitly aimed at weakening the yen.
Instead, the yen's drop of about 19 percent against the
dollar since late 2012 is a natural consequence of the BOJ's
unprecedented monetary easing, set up to generate inflation of 2
percent within two years.
The higher import costs resulting from a weaker currency has
in turn eroded Japan's balance of trade, further undermining the
yen. Japan's current account, the broadest measure of a
country's trade with the rest of the world, logged a record
deficit in November, a second straight month in the red.
"One reason that made the yen a safe haven was Japan's
current account surplus. But the surplus has disappeared, which
means any buying stemming from that factor has weakened
considerably," Citigroup's Takashima added.
While economists say the current account is likely to return
to surplus in coming months as the country's income balance
remains strong, most agree the surplus will decline long term.
To be sure, one factor that could help the yen keep some of
its safe-haven status for another year or so is that whenever
investors' aversion to risk rises, their knee-jerk reaction is
often to seek currencies with low, stable interest rates, which
are often used as funding currencies for riskier bets.
Three-month money in Japan is indicated at less than 0.06
percent in financial markets.
Therefore, the same monetary policies that set the yen on
its long-term downward slope could also add to its short-term
appeal in times of market anxiety, to the extent that the BOJ is
able to maintain stability in the JGB market.
So far, the BOJ's asset purchases have effectively kept a
lid on JGB yields. The yield on the benchmark 10-year JGB
has stuck to range of 0.580 percent and 0.740
percent since September, and is now around the midpoint of that
The BOJ has vowed to keep pumping liquidity into markets
until its policy target is reached. Japan passed the halfway
mark towards its 2 percent inflation goal in November, but many
economists and market participants question whether the BOJ can
meet its goal in its two-year time frame.
Naomi Muguruma, senior strategist at Mitsubishi UFJ Morgan
Stanley Securities, said BOJ Governor Haruhiko Kuroda "sounds
very confident" about reaching the target in two years, but
markets were less convinced.
"As long as the BOJ maintains QE, that means the BOJ
continues to purchase JGBs in a large amount every month, so
that helps the JGB market remain stable," she said.