‘Well What If There Is No Tomorrow?!’ We’re All Phil Connors Now

There’s something paradoxical about investors flocking to the yen during bouts of risk-off sentiment tied to provocations from everyone’s favorite Hermit Kingdom.

On Monday evening, the yen surged immediately on news that a missile was flying over … wait for it … Japan.

Although historical precedent is admittedly hard to come by given that Japan hasn’t ever suddenly ceased to exist, after talking with our highly-paid team of FX strategists, I’ve come to the conclusion that there would be significant downside for the yen in the absence of a place called Japan.

So this sets up a profoundly absurd dynamic wherein the yen will be bid on North Korea jitters right up until everyone starts to believe that Pyongyang may actually bomb Japan, at which point other safe havens will outperform the yen by virtue of not being subject to an extinction event.

As BofAML dryly notes in a piece out this morning, “if tensions intensify again, there could be a cross-current of JPY strength and weakness, leading to higher volatility.”

And it gets funnier still. To wit, from the same note:

In terms of flow, Japanese investors are generally dip buyers at the moment, but the natural buying force could be undermined as some investors may sell their foreign assets to reduce exposure to risk assets at some point if tensions keep rising — at least initially before fleeing to non-yen assets in case of an extended rise in tensions.

This is going to turn everyone into Phil Connors: “Well what if there is no tomorrow? There wasn’t one today”…

In the event everyone starts to think maybe “there is no tomorrow” for Japan, BofAML notes that “potential JPY weakness would likely be manifested first against gold and CHF, which would likely be considered relatively lower risk than the yen in the case of a geopolitical incident around Japan, then USD, and finally against broad currencies.”

Here’s a fun table that shows how a cross-section (figuratively and literally in the case of the FX pairs) of Japanese assets has performed during past instances of “Kim risk”…

Position accordingly.

And don’t forget this rather disconcerting set of visuals…