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Possible Fate of the Japanese Yen amid Increased Uncertainty

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Sep. 22 2017, Updated 4:37 p.m. ET

Multiple uncertainties to impact the Japanese yen

The Japanese yen (FXY) is considered one of the safe havens in the financial markets. Recent geopolitical events have seen the currency turn volatile amid increased uncertainty from tensions out of North Korea. In addition to geopolitical tensions, a hawkish turn of events with the US FOMC (Federal Open Market Committee), the European Central Bank, and the Bank of England has also added crosswinds to the currency markets, impacting the price of the Japanese yen (YCS) in relation to other major currencies such as the US dollar (UUP). With the possibility of snap elections in Japan and doubts about policy continuance at the Bank of Japan, the Japanese yen could remain volatile in the coming months.

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Effects of a volatile Japanese yen

Since Japan is an exporter country, fluctuations in its currency’s value impact the performance of many companies headquartered in Japan. A few examples of large Japanese companies include Honda Motor (HMC), Sony (SNE), and Toyota (TM). Most of these companies would have hedged their exposure through forward contracts, but continuous volatility is not desirable. Domestic uncertainty in Japan usually leads to a depreciation of the yen, which is positive for all exporters since it improves their competitiveness and profit margins.

What to expect for the Japanese yen

With the possibility of a further divergence in monetary policy between the Bank of Japan and other major central banks as well as higher bond yields and a continued global growth, the Japanese yen could depreciate further with respect to the US dollar, the euro (FXE), and the British pound. The risk to this outlook is an escalation of geopolitical tensions, which would likely increase the demand for the yen.

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