Yen's Safe-Haven Status Called Into Question

Does the Yen’s Pullback Take the Heat Off Bank of Japan?
Akio Kon | Bloomberg | Getty Images

The safe-haven status of the Japanese yen is being called into question after it hit fresh multi-year lows against the euro and the dollar on Monday as the Bank of Japan (BOJ) launched its latest bond buying program.

Unlike in recent years, the driving force behind the yen is now domestic policy said, Mitul Kotecha, head of global foreign-exchange strategy at Credit Agricole CIB, who sees dollar-yen at 102-103 by the year-end—a drop of over 4 percent for the yen from current levels.

"The overriding driver for the yen is now Japanese policy, yield differentials between U.S. Treasurys and Japanese government bonds, and the fact the yen is the funding currency of choice. The currency's safe-haven appeal is less extensive," Kotecha told CNBC.

A weaker yen and low interest rates in Japan are encouraging investors to borrow the currency to fund investments in higher yielding assets abroad, said experts, putting additional pressure on the currency.

(Read More: Japan Current Account Swings to Surplus, Finally)

Ray Attrill, global co-head of foreign-exchange strategy at National Australia Bank, who agrees the yen's days as a safe haven are "numbered," noted that if U.S. Treasury yields move higher later in the year—as the market prices in the end of quantitative easing—this would further push dollar-yen higher.

Attrill expects dollar-yen to cross 100 in the current quarter and 110 by mid-2014.

As evidence that the safe-haven appeal of the currency is diminishing, foreign-exchange strategists point to movement in dollar-yen following the disappointing U.S. jobs report on Friday.

"Following the payrolls data, dollar-yen only saw a very small dip—that's very informative of how the market feels about this trade. It's [yen weakness] going to be for a long time," said David Forrester, senior vice president, G-10 foreign-exchange strategy, Macquarie.

The dollar-yen pair dipped to 95.80 following the release of the data showing the U.S. had added just 88,000 new jobs in March, but recovered to trade above the 97 level later on Friday.

(Read More: Forever Fed: Jobs Blues Sets Up Eternal Easing)

The Japanese currency has been widely seen as a safe-haven asset in the wake of the euro zone's debt troubles and uncertainty over the outlook for the world's largest economy.

But Prime Minister Shinzo Abe's commitment to ending deflation in Asia's second largest economy has driven a turnaround in the currency over the past five months.

The yen has fallen almost 14 percent year to date against the dollar and on Monday hit its lowest level since June 2009 at 98.85 as the BOJ makes a massive shift in its monetary policy to achieve an inflation target of 2 percent over the next couple of years.

(Read More: BOJ Throws In Kitchen Sink in War With Deflation)

The BOJ plans to inject $1.4 trillion into the economy in less than two years, doubling the monetary base and buying government bonds of all maturities. The bank's previous asset-purchase program had focused on buying bonds with only a three-year maturity.