TOKYO -- Even as the repercussions of Russia's invasion of Ukraine roil the global economy, the yen has actually declined more than other major currencies, in a sign that it may be losing appeal as a safe bet in times of turmoil.
The Japanese currency depreciated 2.6% against the dollar between March 7 and Tuesday, softening as far as the mid-118 range. After hovering around 114 to 115 yen to the greenback following the Feb. 24 invasion of Ukraine, it began weakening faster last week amid the surge in prices for crude oil and other commodities.
The yen ranked as one of the worst performers among major currencies over that period, alongside others from countries that rely heavily on imported resources, such as the Turkish lira and South Korea's won.
Japan has been shifting away from the export-heavy economic structure that underpinned investors' attraction to the yen during wars, natural disasters and other crises, and high resource prices now weigh more heavily on its current-account balance. Concerns are growing that the currency could be driven into a downward spiral as a softening yen further widens the country's recent current-account deficit.
Key to the currency's traditional appeal is Japan's position as the world's leading net creditor nation. Previously, the expectation that Japanese investors would flee to their home currency when market conditions got rough spurred traders elsewhere to do the same.
The yen strengthened from the 106 range to beyond 88 against the dollar in the three months after the September 2008 financial crisis, and from around 83 yen to well beyond 80 following the March 2011 earthquake and tsunami.
But there has been no sign of similar appreciation amid the Ukraine conflict. "Japan's current-account balance has worsened, making the yen harder to buy from a supply-demand perspective," said Daisuke Karakama, chief market economist at Mizuho Bank.
Japan ran a current-account deficit of 1.19 trillion yen ($10.1 billion) in January, according to the Finance Ministry -- its second-highest on record -- amid a widening trade deficit.
More Japanese companies have expanded operations abroad, meaning fewer exports from Japan and less buying of yen to convert foreign-currency income. While companies are booking more income from overseas subsidiaries, this is often left in its original currencies. If Japan's current-account balance remains in the red, its abundant net foreign assets will decline as well.
Another contributor to the trend of yen-buying in uncertain times, the yen carry trade, is also in a lull.
When risk appetites are high, traders borrow currencies with low interest rates to invest in higher-return currencies or other assets in markets where rates are higher. Once market conditions take a turn for the worse, the borrowed currencies tend to strengthen as investors unwind these trades.
The yen and the Swiss franc were popular to borrow in before the 2008 financial crisis due to Japan's and Switzerland's markedly low interest rates. More recently, as the U.S. Federal Reserve slashed interest rates to essentially zero, borrowing in dollars came into focus.
While attention is starting to turn back to the yen as the Fed moves toward raising rates, the initial borrowing phase of the carry trade puts more downward pressure on the currency.
Some market players see the yen sinking even lower. A senior currency strategist at SMBC Nikko Securities sees 125 to 130 yen to the dollar as a realistic possibility if crude oil stays around $110 to $120 per barrel.
The yen was nearing 125 against the greenback in 2015 when Bank of Japan Gov. Haruhiko Kuroda commented on the currency's weakness in what was seen as an effort to curb its decline. Even with a return to that level potentially on the cards, the central bank remains committed to large-scale easing.
The policy board is set to begin a two-day meeting on Thursday. With Europe and the U.S. moving toward normalizing monetary policy, "even if the BOJ changes its policy, there's a limit to what it can do" to stem the yen's depreciation, said Ryutaro Kono, chief economist at BNP Paribas in Japan.
A weaker yen raises the cost of imports, adding a further burden on top of higher commodity prices. The price of regular gasoline in Japan now sits around its highest level since 2008, despite the government raising the cap on subsidies to oil wholesalers. More fiscal spending to deal with high commodity prices could risk destabilizing the yen further.