One of the longest-held notions in the financial markets is that the Japanese yen (JPY) is a safe-haven currency. The JPY has exhibited a strong tendency to appreciate during risk-off episodes, such as the Global Financial Crisis (GFC) in 2008 and the Great East Japan Earthquake in 2011. In the past, such a tendency has been broadly explained by Japanese firms’ and financial institutions’ strong appetite to liquidate and repatriate their overseas investment assets to meet potential needs or rebalance their portfolio position during the risk-off episodes.

However, despite the outbreak of the COVID-19 pandemic, this time looks different. There has been only a short-lived appreciation of the JPY amid the prolonged pandemic, heightened geopolitical risks triggered by the Russia-Ukraine war, and growing global economic uncertainties, amplified by a spike in global inflation and major central banks’ aggressive policy responses. In fact, the JPY has been depreciating against the U.S. dollar (USD) since the beginning of 2021. Although most of 2021 was a risk-positive period, the increased pace of JPY depreciation in the past few months, despite elevated market stress, poses a question whether there are any structural changes in underlying dynamics in the JPY movements.

This analytical note aims to understand the key drivers of JPY movements in the period after the COVID-19 pandemic.

Authors: Jinho Choi, Kana Yoshioka, Prashant Pande, Sota Nejime, Sungtaek Kwon, Thiri Aung, Trung Thanh Vu