The news media often reports that Japan is a “safe haven” country, and that the yen tends to appreciate during periods of international stress.
I don’t doubt that this is accurate on one level; it’s pretty obvious how the yen responds to global news. But what exactly does the term “safe haven” mean? What makes Japan safe? Is Japan less likely than Australia or Canada to be attacked by North Korea? Does its GDP fall by less than Australia or Canada’s GDP during a global recession like 2008? Does it have a smaller national debt than countries like Australia and Canada? (Aren’t all three answers a resounding “No”?) What makes Japan such a “safe” place?
I have my own theory (which has nothing to do with safety), but I’d like to hear your views first. I do have one request, however. Most of the explanations that I have read imply that an international shock that caused the yen to appreciate would also raise the value of Japanese stocks.
I have an alternative theory that implies Japanese stocks would fall on safe haven type news, and indeed probably fall by even more than stocks in non-“safe haven” areas of the world. So how do Japanese stocks react to global news that causes the yen to appreciate for safe haven reasons?
Originally published on EconLog