Most people turn to gold when thinking about investing in a “safe haven”. However, only a few know that the Forex market also has its own anti-crisis refuge. It is called the Japanese Yen. The world is in a very unstable position right now. Oil price is very volatile and after many intents, oil-producing countries haven’t been able to come up with an agreement to freeze output.
Signs of The World’s Economic Instability
At the beginning of April, candidate for U.S. presidency Donald Trump forecasted that the U.S. was headed towards a “massive recession” in the coming months. World economists have opposing views regarding the financial future of the U.S. Some like Peter Schiff agree that the stock market is overvalued and that the data shown by the government is more optimistic than what reality really is like. Others are more positive and expect job growth to recover.
On Europe’s side, negative interest rates implemented by many Central Banks threaten Europe and the world’s economy too. Switzerland and Sweden have entered into this territory with rates of -0.75% and -0.35% respectively. Their purpose is to pay their sovereign debts which they haven’t been able to pay via any other method. They also aim at boosting economic growth by making loans cheaper. This will allow consumers to increase their spending. However, negative interest rates come with a big financial downside – In fact, economist decades ago even said they were an impossibility since people would prefer to preserve their capital at home instead of buying a government bond with a negative yield. Given the fact that banks won’t pass those negative rates to lenders since people would prefer to not save money at all, the whole banking system may stumble. This is so because they do pass those rates to borrowers. At the end of the day, banks will have lower earnings and higher expenses which can easily send them downhill.
In China, total debt reached its peak record in the first quarter of 2016. It reached 237% of its GDP. The People’s Bank of China has borrowed a total of $25 trillion in order to boost its economy. Historically speaking, debt growths such as the one seen in China usually result in either slower growth rates or a recession.
Now Let’s Go Back to the Japanese Yen
The reason why the Japanese Yen’s value goes up when there is a financial crisis (or signs of it) is because on average more Japanese investors have their capital on foreign markets than foreign investors have their funds in the Japanese market. Thus, when signs of crisis emerge, Japanese investors sell their foreign investments and demand for the Yen increases internally. On the contrary, when foreign investors sell their Japanese investments it doesn’t result in a dramatic increase value of their local currency.
Besides the possibility of a world economic crisis, another factor that may play positively for the Yen is Japan’s monetary policy. Japan has resorted to stabilize its economy via asset purchasing in the last few years and has left quantitative easing on the side. On the other hand, the European Central Bank has created a QE program that started in 2015 and will go all the way to 2017. Quantitative easing lowers the value of the currency. Thus, the Yen can expect its value to go up when compared to those countries that have QE programs.
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