As market skepticism about the Japanese yen's role as a global safe haven during times of stress deepens, this deteriorating sentiment could accelerate the yen's selling trend. This week, the yen has fallen to its lowest level against the dollar in eight months. Due to Japan's unique deflationary monetary landscape and emerging political uncertainties, the yen's reliability as a traditional safe haven and defensive asset is increasingly being questioned by markets. Investors are turning to alternative hedging instruments, including gold and silver, which are leading both global safe haven assets and most risk assets, the Swiss franc - another safe haven currency that has outperformed the yen, and bitcoin, dubbed the "new safe haven asset."

For decades, from financial crises to geopolitical upheavals, investors have traditionally fled to the yen during market shocks. The logic was simple: Japan's massive current account surplus, stable political system and economic growth, along with its deep domestic investor base, made it a highly reliable "safe harbor" when risk assets plummeted. However, this instinctive safe haven tool is now facing severe tests. On one hand, the yen's performance as a risk hedging tool has become increasingly unstable; on the other hand, markets are increasingly turning to gold in trades that avoid major global currencies.

Particularly this week, after conservative hardliner Takaichi Sanae unexpectedly won the ruling party leadership election, the yen broke through the crucial 150 level against the dollar, highlighting the intensifying yen depreciation trend and causing markets to increasingly discount the yen's "safe haven" label.

"Historically, there have been times when we would go long yen for hedging purposes because in the previous cycle, once risk asset selling occurred, the yen was quite a reliable asset," said Yoshiko Kondo, Head of Multi-Asset Investment for Asia at asset management giant Schroders. "Currently, we don't have sufficient reason to need this hedge," she added, citing higher costs and lower reliability of such hedging.

This shift in the yen's status is also reflected in dramatic changes in correlations. Recent sustained upward movement in USD/JPY (meaning accelerated yen depreciation) has shown periodic negative correlation with the S&P 500 index, coinciding with rising domestic political uncertainty in Japan. This means the yen strengthens when global risk appetite rises and weakens when risk assets are sold off - exactly opposite to how this hedging tool should perform.

**No Longer Using Yen as Risk Barometer**

The yen's partial "breakdown" reflects Japan's unique financial environment. While major global central banks have turned to rate cuts, the Bank of Japan remains the only major central bank maintaining a tightening or rate-hiking tendency. However, its normalization pace is extremely slow, while new LDP President Takaichi Sanae's stance favors stimulus policies and leans toward accommodation.

However, over the past year, the LDP-led ruling coalition has lost its majority in both houses of parliament, so Takaichi Sanae becoming Japan's prime minister is not a foregone conclusion.

"We no longer use the yen as a risk barometer," said Ken Peng, Head of Asia Investment Strategy at Citigroup Wealth Management. The yen "more reflects market expectations about the extent of BOJ rate hikes and whether Japan's reflation and economic growth trends can continue," he stated.

The USD/JPY currency pair's 30-day correlation with the VIX has turned positive, indicating that this traditionally safe haven currency no longer tracks volatility in the expected direction.

Options markets are also sending important signals. Implied volatility for USD/JPY has declined significantly, showing a general lack of urgent hedging demand, while risk reversals - measuring demand for upside versus downside protection for the currency pair - are rising. This indicates market demand is shifting toward betting on continued yen weakness, starkly different from current safe haven asset allocation periods.

Although Japanese 10-year government bond yields rose to nearly 1.7% this week, they remain far below dollar funding costs of over 4%. Investors going long yen would face persistently steep negative carry.

Year-to-date, despite the yen rising nearly 3% against the dollar, it remains one of the worst-performing currencies in the G10. According to the latest data from the Commodity Futures Trading Commission (CFTC), global asset management companies have cut net long yen positions by nearly 40% since late April, while hedge funds generally tend to continue shorting the yen.

Other key hedging options beyond the yen are gaining traction among professional traders. Strategists at Goldman Sachs and Bank of America believe the Swiss franc may provide more reliable and lower-cost hedging properties than the yen. This week, the franc against the yen has hit record highs almost daily, but this hasn't deterred the bulls.

Traditional safe haven assets - gold and silver - as well as "newcomer safe haven asset" bitcoin are also increasingly popular in markets. Takuji Tsukamoto, a senior researcher at Pictet Asset Management based in Japan, said domestic Japanese investors seem more inclined to purchase gold, primarily as protection against further sovereign currency depreciation under Takaichi's leadership.

Against the backdrop of this year's turbulent global trade situation, continued threats to Federal Reserve monetary policy independence from the Trump administration, and expanding U.S. fiscal deficits, gold has surged over 54% this year. Top Wall Street investment institutions like Goldman Sachs and JPMorgan believe gold's rally - which has repeatedly hit record highs and broken through $4,000 this year - is far from over and may even breach the epic $5,000 level in the future.

**Defensive Properties Still Exist**

Of course, the yen's long-term appeal as a defensive asset class hasn't completely disappeared. "Trading linked to Takaichi policies tends toward yen weakness in initial stages but is not expected to last more than about a month and is currently viewed as temporary," said Yusuke Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation. He added that USD/JPY moving toward 160 would also increase the likelihood of Japanese authorities intervening.

But for now, lower global volatility reduces this major demand for emergency hedging, and the "Takaichi trade" - a hot trading theme recently - has made yen carry trades popular again in markets. This means Japan's sovereign currency is increasingly deviating from its long-standing historical "safe haven" role and is more susceptible to speculative capital flows.

The recently globally popular "Takaichi trade" refers to the expectation that new LDP President Takaichi Sanae's victory would restart policies centered on "Abenomics," triggering violent fluctuations in stock, bond, and currency markets. The "Takaichi trade" primarily manifests as Japanese stocks surging on the news, continued yen depreciation, and restarting of "yen carry trades." Therefore, betting on "Takaichi trade" logic essentially equals betting on a Japanese reflation combination of "stronger fiscal stimulus, industrial support, and accommodative monetary policy" - long Japanese stocks, short yen, avoid long duration.

"Japan used to give an impression of reliable unchangingness, but has now become politically uncertain," said Taketo Shimizu, Chief Investment Officer for Fixed Income at Tokyo-based Asset Management One. "We have to admit that the yen is now less trustworthy."