No Longer a Safe Haven Currency? A Fresh Evidence of Japanese Yen under Uncertainty

This paper aims to study the safe haven attribute of the Japanese yen under domestic and U.S. economic and policy uncertainty (EPU). Because of the existence of structural changes, a bootstrap rolling window subsample causality test is used to enhance the credibility of the results. The empirical results confirm that the exchange rate returns (RER) and Japanese EPU are correlated in specific periods when major economic or political events occur. In most crisis periods, the Japanese EPU has positive effects on RER, and the yen appreciates when the EPU is increasing. In addition, the RER of the yen and U.S. EPU are both negatively and positively connected. This finding confirms the hedging function of the yen in certain periods. The reason for this relationship is that Japan's low interest rates make the yen the primary funding currency in speculative carrying trade strategies, and thus, it tends to appreciate during crisis periods regardless of the origins of the EPU shocks. Therefore, the yen can be held as a safe haven currency unless the government intervenes artificially. JEL: C32, E52, F31.