- The Japanese yen has tumbled to a 20-year low against the dollar, as investors ditch the once-mighty currency.
- The yen was once viewed as a "safe haven" — a currency to take shelter in when markets are rough.
- But a surge in the dollar and worries about Japan's economy mean the yen is having a torrid time in 2022.
Investors have long sought the safety of the Japanese yen when things get choppy, buying up the currency in the belief that it will hold its value and shelter them from the storm.
But with a war raging in Ukraine, inflation ripping through advanced economies, and stocks tumbling, it's clear the yen's days as a "safe haven" may be over.
The Japanese currency crashed to a 20-year low against the dollar Thursday, as investors fretted about the state of the economy, and as the greenback continued to surge.
The yen has lost around 11% this year to trade at 130.4 to the dollar Friday, the lowest level since June 2002.
Dollar leaves everyone in the dust
All of the world's 10 most-traded currencies have fallen sharply against the dollar in 2022. But the Japanese yen is by far the worst performer.
The US Federal Reserve has hiked interest rates already, and is planning to raise them even more aggressively in the coming months.
Other central banks plan to move less quickly. That means investors are attracted to the US, where they're likely to earn a higher return, and so they snap up the dollar.
The dollar index has risen around 7.7% as of Friday to 103.06, its highest level since late 2002.
"The Federal Reserve is set to boost interest rates 0.5 percentage points at its meeting next week, and is on track for 3% rates by the end of this year," Ben Laidler, global markets strategist at eToro, said.
"Heightened global risks, from the Ukraine war to China's covid lockdowns, are also stoking demand for the traditional 'safer haven' of the US dollar," he added.
Japan's economy falters
While the Fed plans to raise interest rates to cool an overheating economy, the Japanese authorities are grappling with low inflation and growth.
The International Monetary Fund expects Japanese gross domestic product to grow 2.4% in 2022 and 2.3% in 2023, compared with US growth of 3.7% and 2.3%. And that's after Japan fared considerably worse during the pandemic.
Where the US and Europe are grappling with a surge in prices, Japan's problem is a lack of inflation. The IMF expects inflation there to come in at 1% in 2022, and 0.8% in 2023.
It all puts the Bank of Japan in an unenviable position. The central bank held rates and pledged to cap the 10-year government bond yield at 0.25% this week, triggering a further slide in the yen.
"The BoJ stood firm once again on Thursday, leaving rates unchanged, and even doubling down on yield curve control, signaling a commitment to easing, despite the plight of the yen," Craig Botham, economist at Pantheon Macroeconomics, said.