As with most yen pairs, the USD/JPY pair has exhibited strong positive correlations with various risk appetite gauges (e.g., the VIX, the S&P 500 index, corporate spreads, and interest rate swaps).
When risk appetite picks up, investors and speculators are emboldened to maximize their returns via carry trades, i.e., borrowing in low yielding currencies, such as the yen and Swiss franc, and placing the proceeds in higher-yielding instruments, such as equities, commodities, and higher-interest rate currencies.
During low risk-appetite periods, these trades are curtailed, either by way of unwinding (funds return to lower-yielding currencies such as the yen and franc) or by speculators initiating fresh open positions in the yen and the franc.
This has translated into a fairly positive correlation between yen pairs (USD/JPY, EUR/JPY, GBP/JPY, etc.) that is likely to extend into 2009, as long as the stress in credit and equity markets persists. It shows the positive relationship between the USD/JPY rate and the VIX since 1996. Note how multi-year peaks in the VIX were often accompanied by significant lows in USD/JPY as the Japanese currency flexed its safe-haven muscles.
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