Japan's Political Uncertainty Drives Shift to Swiss Franc, Yen Loses 15% in 3 Months

In recent developments, the political landscape in Japan has become increasingly uncertain, prompting strategic shifts in the currency markets. Both Goldman Sachs and Bank of America have advised investors to favor the Swiss franc over the Japanese yen. This recommendation comes as the political instability in Japan has eroded the yen's appeal as a safe-haven asset.

The strategy teams at Goldman Sachs and Bank of America have both suggested going long on the Swiss franc against the Japanese yen. This move is driven by the escalating political risks in Japan, which have diminished the yen's traditional role as a refuge for investors seeking stability. The Swiss franc, known for its strong fiscal health, is seen as a more attractive option in the current climate.

The political uncertainty in Japan has led to a significant reduction in the yen's attractiveness as a safe-haven currency. This shift is reflected in the recommendations from major financial institutions, which are now favoring the Swiss franc. The Swiss franc's stable economic environment and strong fiscal policies make it a more reliable choice for investors looking to hedge against political risks.

The recommendation to go long on the Swiss franc against the Japanese yen is based on the belief that the political instability in Japan will continue to weigh on the yen. This view is supported by the fact that the yen's traditional role as a safe-haven currency has been undermined by the current political climate. As a result, investors are turning to the Swiss franc, which offers a more stable and predictable investment environment.

The yen has been the worst-performing currency among the Group of Ten (G10) nations over the past three months. The resignation of Prime Minister Fumio Kishida has added further pressure on the yen, as it opens the door for a successor who favors loose fiscal policies. The divergence in monetary policy paths between the Bank of Japan and the Swiss National Bank has also supported the Swiss franc against the yen, with the currency pair reaching new highs this week. The normalization process of the Bank of Japan's policy has been clouded by political uncertainty, while the Swiss National Bank appears to have reached the lower limit of interest rates amid rising inflation.

The Swiss franc's appeal has grown in recent years due to Switzerland's robust macroeconomic fundamentals. Japan's real yield is negative, while Switzerland's real yield is slightly positive. Although Japan has a large current account surplus, most of its surplus comes from investment income, which is typically reinvested overseas. Japan's trade balance has been in deficit since 2011, while Switzerland's trade surplus has been expanding.

Official funds have also flowed from the yen to the Swiss franc. Global foreign exchange reserve managers have increased their allocations to the Swiss franc, with its share in global reserves rising to 0.76% as of March 31, the highest level since 1992. Although the Swiss franc's share is still far below the yen's 5.15% share, this trend indicates that the Swiss franc is becoming more attractive in reserve investment portfolios.