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The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis

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Author Info

  • Dennis P. J. Botman
  • Irineu E. Carvalho Filho
  • Raphael W. Lam

Abstract

During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stance can explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-off episodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/228.

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Length: 21
Date of creation: 06 Nov 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/228

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Related research

Keywords: Currencies; Japan; Exchange rate appreciation; Capital flows; Monetary policy; Risk management; Safe Haven; Yen Volatility; Derivatives; foreign exchange; real exchange rate; exchange rates; exchange rate movements; currency swaps; exchange rate volatility; exchange markets; spot exchange rate; effective exchange rate; foreign exchange swaps; currency appreciation; foreign exchange market; currency risk; foreign exchange markets; capital inflows; real effective exchange rate; exchange rate appreciations; real exchange rate appreciation; alternative exchange rate; hedging; real exchange rate appreciations; foreign exchange transactions; risk aversion;

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  1. Takatoshi Ito, 2007. "Myths and reality of foreign exchange interventions: an application to Japan," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 133-154.
  2. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Working Paper Series 1565, European Central Bank.
  3. Broner, Fernando & Didier, Tatiana & Erce, Aitor & Schmukler, Sergio L., 2011. "Gross capital flows : dynamics and crises," Policy Research Working Paper Series 5768, The World Bank.
  4. Habib, Maurizio M. & Stracca, Livio, 2012. "Getting beyond carry trade: What makes a safe haven currency?," Journal of International Economics, Elsevier, vol. 87(1), pages 50-64.
  5. Kristin J. Forbes & Francis E. Warnock, 2011. "Capital Flow Waves: Surges, Stops, Flight, and Retrenchment," NBER Chapters, in: Global Financial Crisis National Bureau of Economic Research, Inc.
  6. Bussirère, Matthieu & Lopez, Claude & Tille, Cédric, 2013. "Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth?," MPRA Paper 44053, University Library of Munich, Germany.
  7. Reinout De Bock & Irineu E. Carvalho Filho, 2013. "The Behavior of Currencies during Risk-off Episodes," IMF Working Papers 13/8, International Monetary Fund.
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