The won-yen exchange rate hit a two-year high, fueled by a series of fear factors. The increasing financial volatility caused investors to flock to the yen as a risk-free asset.
As of 3:00 pm, February 11, the arbitrage rate rose by 42.07 won per 100 yen compared to the previous trading day to 1,066.71 won per 100 yen. This daily increment was the largest since September 14, 2011, when the amount of increase had been 50.52 won per 100 yen. The arbitrage rate exceeded 1,060 won per 100 yen for the first time since February 2014.
“The recent strong yen is because of something more than investors’ preference for risk-free assets in that the outflow of funds from the Japanese government bonds and stock exchange is somewhat excessive as of late,” said Park Yu-na, research analyst at Dongbu Securities, continuing, “The Japanese government did not intend to cause the appreciation of the yen and a high level of volatility in opting for a negative interest rate.”
The rapid appreciation of the Japanese currency that is defying the negative interest rate can be attributed to global investors’ jitters for the recent plunge in the Chinese stock market, plummeting oil prices, worsening U.S. economic indicators and concerns over the solvency of European banks.
“As of now, an increasing number of investors are opting for the U.S. government bonds, gold and the yen, which have been traditionally regarded as safe assets,” the Bank of Korea explained, adding, “Japan is the world’s largest net creditor country and market participants think it is structurally free from a foreign exchange crisis.”
The yen-dollar exchange rate fell from 120 yen to 114 yen per U.S. dollar after the Bank of Japan brought in the negative interest rate. In addition, the rate fell below 113 yen per U.S. dollar in the morning of February 11 after the Federal Reserve Board hinted at a delay in interest rate hike, which is expected to lead to the continuation of the strong yen.