The Japanese Yen is considered one of the safest currencies to invest in during times of market turbulence. Where the Euro is thought of as a brave investment, the Yen is a safe bet, and both are preferred to the US Dollar at present.

The Yen is also considered a good indicator of investor fear. When the value of the Yen rises, it usually precedes an increase in market volatility. At present the currency is enjoying a slight resurgence, which last week was linked to the rapid slow down of the stock market bull run of trading, but this week is down to the drop in USD value.

The greenback currency fell to a five-month low on Tuesday vs the Yen. Investors are deterred by the US Treasury yields dropping and fears about the US government is giving tax cuts while planning to heavily invest in infrastructure – a costly expenditure likely to add debt, and in turn a deficit in debt repayment. This fear is steering them away from the Dollar and in to the Yen.

As uncertainty creeps in then old habits return, and people fall back to the Yen while they gauge their bearings and decide what to do next with their money. This brings us on to gold…

The Yen and Gold:

The Yen is like gold, though less proven in the long-term as a good store of value. In currency terms it’s safe, it’s reliable, and it’s the fall-back point for investors when they’re not sure where to go next. Since 2011, the Japanese Yen and gold prices have moved similarly in the markets. This has led to them both being considered as within the same asset class.

It’s not surprising, given that both gold and the Yen are favoured investment options in times of economic uncertainty, but the reality is that this is wrong. It’s a quirk that the Yen and gold roughly match the same patterns, but there is notable lag between their individual rallies. While one often serves as a precursor to a rise in value of the other, this is a short-term indicator rather than anything more telling.

The Yen and gold should not be in the same asset class. Their correlation is coincidence. Commodity trading expert Peter Brandt goes into good depth on the matter in a post on his website, stating that correlations come and go. Since the 1970s there have been mixed spells of positive and negative correlation between the Yen and Gold, and Brandt is not alone in thinking this, with many other experts predicting an imminent break from this trend after nearly seven years of being in sync. The deciding factor? A drop in the Yen’s value.

Japan’s outlook:

For the Bank of Japan, if the US Dollar keeps behaving erratically then the Yen will be steady in either direction, but if the Federal Reserve can shore up the Dollar’s weaknesses then it will regain favour and begin to hurt the Yen. The Dollar is easier to deal in across a range of investment opportunities and hedge funds and investors like momentum. They would not be afraid to cut their losses with the Yen and move across to USD.

The break is a risk for the Bank of Japan, who are dealing with slow but steady growth in the Yen and a shrinking national economy. Japan has an ageing population and a declining birth rate, which makes economic growth difficult to achieve. Factor in last year’s fears with regards North Korea and you can see the amount of strain the BoJ are under. These tensions have kept the value of the Yen down, which has been a large part of the reason it behaved similarly to the gold prices.

Morgan Stanley offer a glimmer of hope for the Japanese economy, predicting that inflation generated from the growing world economy will bolster the Yen. This would be at the expense of gold bullion, which would also lead to a move away from the correlation, but ultimately this has been an interesting window of synchronisation between the value of Yen and the value of gold and no more than that. What was dubbed correlation by some was mere coincidence, and its time is over.