Why the Japanese Yen Matters
Decades of near-zero interest rates turned the yen into the world's default funding currency and a classic safe haven at once — a combination that makes its moves felt far beyond Japan.
A currency with two identities
The yen occupies an unusual position in currency markets: it's treated both as a safe haven that investors buy during periods of stress, and as the classic funding currency for carry trades during calm periods. Those two roles seem contradictory, but they share the same root — Japan's exceptionally low interest rates for most of the past three decades made the yen cheap to borrow, while Japan's large net foreign asset position and current account surplus gave it the stability investors associate with a safe haven.
Decades of low rates shaped the yen's role
After Japan's asset bubble burst in the early 1990s, the Bank of Japan kept interest rates near zero — and at times below zero — for far longer than other major central banks, even as the rest of the world cycled through tightening and easing. That prolonged gap made the yen the go-to source of cheap funding for investors looking to buy higher-yielding assets elsewhere, embedding it deeply into global carry trade flows.
When the yen jumps, other markets feel it
Because so much global carry trade activity is funded in yen, a sharp yen rally can force investors to unwind those positions quickly, selling the higher-yielding assets they bought with borrowed yen to repay their loans. That unwinding can spread beyond currency markets into equities and other risk assets, since the same leveraged capital often touches multiple markets at once, and the resulting scramble to buy back yen can push the currency even higher, feeding the cycle further.
Bank of Japan policy is a global event
Given how embedded yen funding is in global markets, even modest shifts in Bank of Japan policy — a rate move, a change in bond-buying, or a shift in forward guidance — draw outsized global attention compared with policy shifts in economies of similar size. Markets watch for signs that Japan's long era of ultra-low rates is ending, since that would narrow the rate gap that makes yen funding attractive in the first place, and any sustained narrowing tends to raise the odds of exactly the kind of unwind described above.
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Quick answers
Why is the yen considered a safe-haven currency?
Japan's large net foreign asset position and current account surplus give investors confidence in the currency's stability, so demand for the yen often rises during periods of global market stress.
What is a carry trade funding currency?
A currency with persistently low interest rates that investors borrow cheaply in order to invest the proceeds in higher-yielding currencies or assets elsewhere — a role the yen has played for decades.
Why does a small Bank of Japan policy shift move global markets?
Because so much global carry trade funding runs through the yen, even modest changes in Japanese rates can trigger position unwinds that ripple into currency, bond, and equity markets worldwide.