Strategists Favor Swiss Franc Over Yen Amid Japan's Political Risks

Strategists from Goldman Sachs and Bank of America have recently shifted their focus to the Swiss franc, favoring it over the Japanese yen. This shift is driven by the escalating political risks in Japan, which are diminishing the yen's appeal as a safe-haven asset. The strategists emphasize that the Swiss franc, supported by Switzerland's robust fiscal health, is becoming an increasingly attractive option for investors concerned about the rising risk premiums associated with traditional safe-haven currencies like the U.S. dollar and the Japanese yen.

The Bank of America's chief Japan foreign exchange and interest rate strategist noted that given the stable fiscal conditions in Switzerland and the increasing risk premiums on traditional safe-haven currencies, investing in the Swiss franc against the Japanese yen is a clear expression of Japan's fiscal risks. The bank recommends going long on the Swiss franc against the Japanese yen, with a target of 189.

Goldman Sachs strategists, including Michael Cahill, share this perspective. They argue that Japan's new political uncertainties are providing support for the Swiss franc and the euro, as both currencies are expected to benefit from concerns over U.S. growth and the Federal Reserve's continuous rate cuts.

The Japanese yen has been the worst-performing G10 currency over the past three months, facing additional pressure following the resignation of Prime Minister Fumio Kishida. His departure has paved the way for a successor who supports more expansionary fiscal policies. The divergence in central bank policies has also bolstered the Swiss franc against the Japanese yen, with the pair reaching a new historical high this week. The normalization of the Bank of Japan's policy is clouded by political uncertainties, while the Swiss National Bank appears to have reached the lower limit of interest rates amid rising inflation.

As the yen struggles under the weight of Japan's leadership transition, the Swiss franc against the Japanese yen is expected to gradually approach the previously unimaginable 200 mark. The contrasting stances of the central banks further support this trend. For the yen, the likelihood of a rate hike by the Bank of Japan this year is diminishing amid domestic political turmoil.

In recent years, the Swiss franc has been favored by some investors due to Switzerland's strong macroeconomic fundamentals. Japan's negative real interest rates contrast sharply with Switzerland's moderate positive rates, despite Japan's substantial current account surplus, which is primarily driven by investment returns that are often reinvested overseas. In contrast, Japan has run a trade deficit for most of the time since 2011, while Switzerland's trade surplus has continued to expand.

The trend of shifting from the yen to the Swiss franc is also evident in official fund flows. According to an analysis of International Monetary Fund data, global foreign exchange reserve managers have increased their allocation to the Swiss franc, with its share of global reserves rising to 0.76% as of March 31, the highest level since 1992. Although this is still far below the yen's 5.15% share, the trend indicates that the Swiss franc's appeal in reserve investment portfolios is growing.