The yen’s status as a haven in times of global stress faces growing skepticism, threatening to exacerbate a selloff that sent the currency to an eight-month low this week.

For decades, investors have turned to the yen during market shocks, from financial crises to geopolitical blowups. The logic was simple: Japan’s huge current-account surplus, stable political system and deep domestic investor base made it a reliable refuge when risk assets tumbled.

But that instinct is now under strain, undermined by the Japanese currency’s increasingly inconsistent behavior as a hedge and a move toward gold as part of a trade that shuns major currencies. The yen broke above the key level of ¥150 against the dollar this week following hard-line conservative Sanae Takaichi’s surprise victory in Japan’s ruling party leadership race.

"Historically, there were times we went long the yen from a hedging perspective, because in the previous cycle, the yen could be quite reliable when there was massive risk off,” said Keiko Kondo, head of multi-asset investments for Asia at Schroder Investment Management. "Currently, we don’t have enough reasons to be wanting that hedge,” she added, pointing to the higher cost and lower reliability.

This change in the yen’s status is reflected in a major shift in correlations. Dollar-yen has seen periods of negative relationship with the S&P 500 Index recently, which coincided with episodes of political uncertainty in Japan. That means the yen is strengthening during global risk-on times and weakening during selloffs, the opposite of how a hedge is supposed to behave.

Some of the breakdown reflects the unique financial landscape in Japan. The Bank of Japan remains the only major central bank with a tightening bias, even as global peers pivot toward rate cuts. But its pace of normalization has been glacial, and pro-stimulus Takaichi favors accommodative policy.

"I’m not using the yen as a risk barometer much anymore,” said Ken Peng, head of investment strategy for Asia at Citigroup’s wealth management unit. The yen has become "more of a reflection of the market’s expectations about how much the BOJ will hike rates, and whether Japan’s reflation and growth continues,” he said.

Dollar-yen pair’s 30-day correlation with the CBOE Volatility Index has turned positive, suggesting the currency is no longer tracking volatility in the expected direction.

The options market is also telling. The significant drop in implied volatility in dollar-yen shows a broad lack of urgency to hedge, while risk reversals — a gauge of demand for upside versus downside protection for the currency pair — are on the rise. That signals demand is shifting toward bets on yen weakness.

While the yield on Japan’s benchmark 10-year bond this week rose to nearly 1.7%, it’s still far below comparable dollar funding costs of over 4%. That leaves investors with steep negative carry if they go long the yen. The yen ranks among the worst-performing G10 currencies year-to-date, despite advancing almost 3% against the dollar.

Asset managers have cut net long yen positions by almost 40% since late April, while hedge funds are short the Japanese currency, according to the latest Commodity Futures Trading Commission data.

Other hedging options are finding traction among traders. The Swiss franc may offer a more reliable low-cost hedge than the yen, according to Goldman Sachs Group and Bank of America strategists. The franc has hit a record every day this week against the Japanese currency, and that isn’t deterring bulls. Gold, silver and bitcoin are gaining favor.

Japanese investors are buying more gold for several reasons, including as protection against further depreciation of the currency, said Takuji Tsukamoto, a senior fellow at Pictet Asset Management Japan.

Of course the yen’s long-term appeal as a defensive asset isn’t totally dead.

"While the so-called ‘Takaichi trade’ is currently tilted toward yen weakness in its early phase, it is not expected to persist for more than about a month and is regarded as temporary at this stage,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking. He added that a move in the yen toward ¥160 against the dollar also makes intervention more likely.

For now, though, lower global volatility has reduced the need for urgent hedging, and yen-funded carry trades are back in favor. That means Japan’s currency is becoming increasingly removed from its historical role — and more vulnerable to speculative flows.

"Japan used to have this sense of reliability as a country that wouldn’t change, but it’s now become uncertain politically,” said Taketomo Shimizu, chief investment officer of fixed-income at Asset Management One in Tokyo. "The yen is less trustworthy now.”