How Safe Is a Safe Haven?

The idea of finding a safe haven in turbulent financial times such as these is that conditions in your home currency are sufficiently “challenging” that your investments held in that currency will depreciate, and you are looking for a solution which will, at least, protect the value of your assets.

Japan is the world’s third largest economy and one of the world’s leading exporting nations. It’s a democracy, fervently capitalist and it’s stable. The perception of being both stable and successful are the two key factors to a country being on the short list of safe haven currencies. Alternative popular choices are Switzerland (Swiss Franc) and Australia (Australian Dollar).

Whilst Japan’s progress since emerging from the destruction of World War II has been little short of miraculous and established it as the world’s second largest economy behind the USA for many years until it was eclipsed by China last year, there are many disquieting facts. Firstly, Japan is currently in recession; the economy having contracted in Q4 2010 and ever since (not least because of the devastating natural disaster which struck the nation in March). Secondly, it has battled with deflation for nearly two decades – falling prices suppress domestic demand. Thirdly, it faces a demographic time bomb as its population ages and retires, driving up social costs such as healthcare and retirement provision. Fourthly, the very fact that the Yen is a safe haven currency has forced it higher against all of its major trading partner currencies, making Japanese exports more costly in importing markets and diminishing profits from overseas businesses when they are repatriated to Japan. As recently as July 2008, the Euro was buying ¥170; currently it is recovering from a low of ¥102.


The reason for the inexorable rise of the Yen against the Euro is the continuing sovereign debt crisis in the Eurozone. However, Japan owes more than 25 times more money than Greece does – its debt is estimated at 200% of GDP. The bubble is going to burst sooner or later.