Here's why the Japanese yen is a currency to watch - Business Insider

. This is very important because when there is political or economic uncertainty in Asia, investors usually express their views through the Japanese yen. So if breaking news causes a crisis of confidence, there will be big moves in Japan's currency, even if the problems are not in Japan.Yet the most important characteristic of the Japanese yen happens to be its long history of zero rates. More than two decades ago, Japan pioneered the idea of zero rates.

Zero interest rates force institutional and individual investors to hunt for yield abroad. Japan's zero rate policy drove trillions of dollars out of Japan. For 28 years straight Japan has been the world's biggest investor. Much of this moneyRead more about the long-term affect of negative ratesAs other countries around the world lower interest rates, they too could experience this massive investment outflow.

Before the financial crisis, there was a strong appetite for risk, so much of the money provided by selling yen flowed into risky assets like residential subprime mortgage-backed securities and collateralized debt obligations. When the bubble burst, those assets crashed in value, and yen-funded trades were unwound quickly, reducing liquidity in US dollars and other currencies. Central banks around the world responded with quantitative easing, pouring new money into the economy.

Also, because the yen is a popular funding currency, uncertainty in Asia, or the markets in general tend to drive the currency higher and not lower. For example, positive US and China trade relations tend to send the yen higher against the US dollar, not lower. Alternatively if trade relations sour, USD/JPY will fall.

Along those lines, when investors are optimistic and equities rally, the yen is generally weaker than other currencies. If there's a market crash, however, you can bank on the yen rising quickly and aggressively. All of this is important because it makes the Japanese yen a measure of market's tolerance for risk.

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