Although the overall Japanese yen has been in a depreciation channel since the beginning of this year, history shows that for investors seeking refuge during the US presidential election, the yen may become a surprising safe haven.

Currently in the gambling market, the balance of victory is tilting towards former US President Donald Trump, so if Trump takes office, investors will inevitably need to formulate new strategies to deal with the impact of the Republican US President on various assets. This situation may amplify volatility in all corners of the market and prompt investors to seek safe havens.

According to data compiled by the media, before the previous elections, the yen's performance had beaten a host of the most popular safe assets such as the US dollar, Swiss franc, gold, US Treasury bonds, and euro. Furthermore, based on an analysis of trends in safe-haven assets and implied volatility of the US stock market, the yen once again became the best-performing currency in extremely tense market conditions in the preparatory stage before the vote on November 5.

Although the yen is the worst-performing G10 currency this year, traders tend to turn to a weak yen during periods of intense market volatility.

Best Safe Haven

Firstly, tariff risks are expected to benefit the yen. During the election campaign, Japan has largely 'escaped' the direct threat of Trump's increased import tariffs, but the warnings from the Republican candidate have kept investors highly alert to the potential damage to assets in target countries.

Ales Koutny, the International FX Manager at Vanguard, the world's second-largest asset management firm based in London, stated that the yen is the best safe haven during the US election, and the yen against the Swiss franc is also likely to appreciate, as US tariff rhetoric towards Europe seems less friendly to Japan.

Trump once threatened to impose high tariffs on imported autos at a campaign rally. According to Morgan Stanley's research reports, if a Republican president takes office, there may be an increased risk of tariffs on EU vehicle exports, which is expected to have a significant impact on local car companies.

Secondly, investors believe that the yen still has a crucial advantage. Even though the Japanese ruling coalition failed to win a majority of seats in parliament on October 27, the yen fell by 1% as a result. However, Japan's record-breaking 3.02 trillion yen (approximately $20 billion) current account surplus, strong yen liquidity, and relatively low inflation all contribute to making the world's third-largest trade currency an attractive store of value.

Thirdly, the yen to USD exchange rate is currently at a historical low. In situations where the market experiences intense fluctuations or government intervention to support the yen, there is a greater potential for significant upward movement. As of the report, the USD to yen exchange rate is approximately 1 USD to 153 yen.

Additionally, the Bank of Japan is currently the only developed market central bank that is close to considering a rate hike as the next policy step. While the Bank of Japan is expected to keep rates unchanged this week, the possibility of a rate hike later this year may increase if the current weakness of the yen intensifies inflation, which would also boost the yen.

Concerns About Other Safe-Haven Assets

Investors' worries about other traditional safe-haven currencies have also bolstered the attractiveness of the yen.

The uncertainties of the US election and the prospects of expanding fiscal deficits have somewhat weakened investors' confidence in the US dollar and US bonds. Neither Trump nor Harris has considered reducing deficits as a key factor in the election, posing greater risks for bond investors.

Stephen Miller, a senior market consultant at GSFM, a company under Canada's CI Financial Institution, pointed out, "If the US bond market struggles due to fiscal deficit risks, then US bonds may not be the safest assets, and the same goes for the US dollar. The yen is relatively cheap, and the Bank of Japan is one of the few central banks moving towards tightening."

In addition, Pictet Wealth Management mentioned several other safe-haven assets: due to potential trade conflicts with the USA, the euro may fall to parity with the US dollar (i.e. an exchange rate of 1); the Swiss franc lacks the liquidity that the Japanese yen has; and the current gold price is trading near record highs, which may limit further price increases.

Of course, some people have a different view on the attractiveness of the Japanese yen. For example, Morgan Stanley believes that US Treasury bonds are better equipped to withstand any sell-off triggered by a decisive Republican victory in the election. Considering that in the $7.5 trillion daily forex market, the US dollar accounts for 88% of all trades, its dominant position is hard to challenge.

Peter Boockvar, Chief Investment Officer of Bleakly Financial Group, believes, "The yen used to be a typical safe-haven currency, but I am not sure if it can still maintain that status. Now it seems to have more carry trades."

Currently, Japan's benchmark interest rate of 0.25% is still several hundred basis points lower than that of the USA, making the yen a popular funding currency in arbitrage trading.

Regarding this, Naomi Fink, Chief Global Strategist at Nikko Asset Management in Japan, said, "The yen remains a safe haven. If we see reduced risks, I still expect the yen to appreciate, and the yen-funded arbitrage trades will be unwound."

Editor/rice