Traditional thinking in forex would suggest that if the yen is getting weaker, it’s a sign that the markets are interested in taking on more risk.

The idea is that the yen and risk are inversely correlated. But, what happens when the market is risk-averse, and the yen weakens?

This has been the case through the middle of February and has some people scratching their heads.

Now, of course, the reputation of a currency doesn’t turn on a dime. So, we can say that Japan will still be seen as a safe haven in the medium to long term. But that doesn’t mean we can’t have short term or a certain set of circumstances that can distort the usual market dynamics.

And, if that distortion persists long enough, it can be the new normal.

What’s Been Going On?

There are two unique situations at the moment.

The first is one that you have to be living under a rock to not know about: the COVID-19 outbreak. The virus has had a negative impact on economic prospects and that includes Japan.

The other has been building for a while. As most of the world faced slower economic growth, the vast majority of central banks embarked on unprecedented easing cycles.

The notable exception was the US. While the Fed did cut rates, it has already raised them previously, so on balance American rates ended up higher than the rest of the comparable world.

Money Doesn’t Make the World Go Round; it’s Yields

There are two important factors in a safe haven: liquidity and yield.

The whole point of moving to a safe haven is to protect one’s wealth. If it’s being eaten away by inflation or opportunity costs, it’s not really “safe”. Liquidity is also important because it ensures that you will get your money when you need it.

The thing is, the US dollar is by far the most liquid in the world. It now offers more attractive yields as well as potential growth that other safe havens like Japan and Switzerland can’t offer.

Despite President Trump’s fulmination on Twitter to weaken the currency, the US dollar index has reached the highest in two years. US indices offer even better returns, consistently beating new record highs.

Japan’s Luster is Wearing Thin

On top of all the previously mentioned, investors are getting a little worried about Japan’s economic performance, as it threatens to fall into recession.

Q4 was impacted significantly by the implementation of the new sales tax, and Abenomics isn’t getting as much popular support. There’s also the added uncertainty of a potential political change. Not to mention the trade tensions with Korea, and a still-pending trade deal with the US!

Well, let’s just say that keeping assets somewhere else for a while might be a good idea.

Speculation is growing that Prime Minister Abe will have to embark on another round of stimulus, or the BOJ will have to, or both in order to shore up the economy. Traders are likely trying to get ahead of that, dragging down the yen in the process.