North Korea risk could turn yen bulls into bears
Safe-haven effect may not hold if Japan comes under direct threat
YOSHIKAZU IMAHORI, Nikkei staff writer
TOKYO -- Investors have responded to North Korean missile and nuclear tests largely by fleeing to the perceived safety of the yen, but that strategy could change if they see a greater risk of direct harm to Japan.
North Korea has accelerated the pace of its missile tests, with launches on May 14 and Sunday, shrugging off U.S. pressure as well as an American missile strike in Syria. Each time such geopolitical risks surfaced this year, investors reflexively piled into the yen.
Since Japan is a creditor nation, uncertainty is believed to spur Japanese companies operating abroad to sell foreign currency such as dollars to repatriate funds. Investors buy yen in anticipation of this trend.
Concern about North Korea seems to evoke this reaction. Yen-buying picked up after the May 14 missile firing, and Japan's currency also strengthened beyond 111 yen to the dollar Monday morning -- following Sunday's test -- before softening again. Akira Moroga of Aozora Bank contends that the pattern will continue barring an extreme situation such as widespread economic stagnation that also affects China and South Korea.
"Even if hostilities begin between the U.S. and North Korea, [investors] won't immediately switch to selling yen," Moroga said.
A statistical analysis by Hidenobu Tokuda of the Mizuho Research Institute found no direct link between anxiety over Pyongyang and yen bearishness. Tokuda developed an index of North Korea risk based on the frequency of newspaper articles about the issue. By this measure, the risk posed by Pyongyang is higher than after the country's first nuclear test in 2006 and is nearing levels last seen in 1994, amid uncertainty over the policies of then-new leader Kim Jong Il, following the death of his father, Kim Il Sung. But neither of those events increased the likelihood of harm to Japan, so the effect on the yen was minimal.
However, Yuji Saito of Credit Agricole Corporate & Investment Bank dismisses yen-buying during crises as "no more than a textbook explanation" of the currency movement. The dollar plunged after the Sept. 11, 2001, terrorist attacks in the U.S., defying the then-established view of the greenback as a haven in crises.
Similarly, "the yen would be sold if there were direct damage in Japanese territory," Saito argued.
Takuya Kanda of the Gaitame.com Research Institute predicts that a ballistic missile strike against Tokyo that impaired the capital's functioning would weaken the yen. If Japan's economy were harmed, a broad sell-off of Japanese assets -- including the yen -- could ensue.
It is impossible to tell how such North Korea-related risk ultimately would affect the yen, given that Japan itself has not faced a direct threat since its currency was allowed to float freely -- a lack of precedent that adds to the risks involved. With the North Korea situation growing ever more unpredictable, investors may need to prepare for a scenario where the normal rules do not apply.