By Marc Chandler
NEW YORK (
BBH FX Strategy
) -- The Japanese economy is recovering from disruption of the earthquake/tsunami. Supply chains have mostly been re-established. The economic contraction is likely to end this quarter. However, the yen strength is not a function of the domestic economic performance. Yet market participants seem to intuitively understand the yen's strength more than the euro's resilience.
The yen is a safe haven, after all. That assertion seems so obvious, that why it is the case is rarely explored. It does not seem to be a function, as some suggest, of its trade surplus, but rather its position as a net international investment surplus country.
That means that Japanese investors own more foreign assets than foreign investors own of Japanese assets. In fact, Japan is the world's largest creditor. Last year, it was in surplus by over $3 trillion. China is the world's second largest creditor at about $2.2 trillion and Germany is in third place with a $1.2 trillion surplus. Next are Saudi Arabia and Switzerland, both of which are net international investment creditors at a little more than half the size of Germany.
Of the world's top five creditors, only the yen and Swiss franc are "clean" plays. Two are pegged or not convertible (China and Saudi Arabia) and one (Germany) is part of a unified currency that is composed of weaker alloys than the German steel.
The safe haven status of the Swiss franc and Japanese yen is risking their domestic economic and financial objectives. The Swiss National Bank has been more aggressive than the Bank of Japan. The BOJ intervened once (so far) and increased the size of its asset purchases. The SNB has steadily moved to increase its sight deposits, buy back bills, and engage in currency swaps.
The SNB took first-mover advantage and this may have helped spur the BOJ's record intervention the next day. However, the Japanese officials have limited their response in recent days to oral arguments (verbal intervention). However, the more successful Swiss officials are in breaking spirit of CHF bulls, the more pressure may mount on Japan and the yen.