Japanese Yen

The Japanese yen is the currency of Japan and the third-most important reserve currency globally (after the US dollar and euro). The yen is notorious as a safe-haven currency — investors flee to it during crises — and is the premier funding currency for carry trades because Japanese interest rates are historically among the world’s lowest.

Safe-haven demand

The yen appreciates during financial crises because investors worldwide view Japan as a safe destination. During the 1998 Russian crisis, the 2008 financial crisis, and the 2020 pandemic panic, the yen soared as risk-off investors unwound carry trades (borrowing yen) and bought yen as a safe asset.

This safe-haven status reflects:

• Credible central bank: The Bank of Japan has decades of credibility.
• Massive reserves: Japan holds over $1 trillion in foreign exchange.
• Fiscal space: Despite high public debt, Japan’s debt is mostly held domestically and in yen, reducing refinancing risk.
• Deep, liquid markets: The yen has 24-hour trading and the deepest markets after the dollar.

During crises, when risks spike, investors buy yen regardless of interest-rate differentials. This safe-haven demand can be devastating for carry trades that are long yen, funded by short yen positions.

Carry-trade funding currency

The yen’s opposite role is as a funding currency for carry trades. For decades, the Bank of Japan kept interest rates near zero (even negative in the 2010s). This made yen borrowing nearly free.

A trader would:

1. Borrow yen at 0% (or negative %).
2. Convert yen to US dollars or higher-yielding currencies.
3. Invest in dollar or emerging-market bonds yielding 3–6%.
4. Pocket the interest-rate differential.

The carry trade is profitable as long as the yen does not appreciate. But any yen strength forces unwinding: a trader must buy yen to repay the loan, and if the yen is already appreciating, the loss accelerates.

Intervention and the Bank of Japan

The Bank of Japan regularly intervenes in the yen forex market. When the yen strengthens sharply (particularly due to safe-haven demand during crises), the BoJ sells yen for dollars to push the yen weaker.

Why? A strong yen hurts Japanese exporters (they receive fewer yen per dollar of sales). The BoJ prioritizes keeping the yen weak to support growth.

This makes the yen pairs (USD/JPY, EUR/JPY, etc.) subject to sudden intervention. A trader betting on yen appreciation must be aware that the BoJ might intervene to reverse it.

Major yen pairs

The yen is a major currency with several liquid pairs:

• USD/JPY — the second-most traded pair globally; quoted as 150.50 (150 yen per dollar).
• EUR/JPY — euro-yen; popular for carry trades (euros yield more than yen).
• GBP/JPY — pound-yen; even higher yield differential.
• AUD/JPY — Australian dollar-yen; commodity exposure plus yield.

These pairs are liquid, but all subject to Bank of Japan intervention and safe-haven flows.

Economic context

Japan’s economy is mature, with low growth, an aging population, and persistent deflation (or very low inflation). This limits yen interest rates because the BoJ must keep rates low to encourage lending and spending.

The absence of high interest rates makes the yen unattractive as a long-term store of value or an investment currency. But it is perpetually available as a low-cost funding currency, and it is the premier safe asset globally.

See also