ORLANDO, Florida, Nov 19 (Reuters) - Conditions are ripe

for a strong rally in the 'safe haven' Japanese yen, with a

global stock market selloff sparking volatility across asset

classes. But the Japanese currency is falling fast, calling into

question its long-perceived role as a preferred hiding spot for

spooked investors.

The yen this week has tumbled to a 10-month low against the

dollar and the weakest level ever against the euro. It has been,

by far, the worst-performing G10 currency in recent months,

raising the prospect of Japanese authorities intervening to lend

it some support.

Domestic issues are the key factor here. Japan's new Prime

Minister Sanae Takaichi appears to be taking notes from the

Donald Trump playbook: go large on fiscal stimulus and lean on

the central bank to keep interest rates as low as possible, even

if inflation is elevated.

Unsurprisingly, investors are in no rush to pile into the

yen despite the global market jitters.

The yen's status as a major safe-haven currency, which it

shares with the U.S. dollar and Swiss franc, is rooted in the

large current account surpluses and ultra-low or zero interest

rates that Japan ran for decades.

These conditions gave rise to the yen carry trade. Japanese

investors recycled the surpluses into higher-yielding assets

overseas, making Japan the world's largest creditor nation for

many years. At the end of June, Japan held a net $3.62 trillion

in overseas stocks and bonds, according to the International

Monetary Fund.

In previous bouts of global market turbulence, repatriation

of even a slender slice of that mountain of assets could deliver

a quick, outsized boost to the yen.

But that's not happening now. Perhaps the tremors roiling

global markets aren't strong enough yet. Or, to cite that

dreaded phrase, perhaps this time is different.

CARRY THAT WEIGHT

To put it bluntly, Japan's domestic policy stance is not

yen-friendly at all.

A ruling-party panel of lawmakers close to Takaichi has

proposed a supplementary budget exceeding 25 trillion yen ($161

billion) to fund Takaichi's planned stimulus package. That's

more than estimates floated recently and much larger than last

year's $92 billion plan.

Meanwhile, Takaichi has also indicated she would prefer the

Bank of Japan not to raise interest rates. Markets have reacted

accordingly. Japanese government bonds have tumbled, sending

yields to historic highs, and the swaps market indicates that

the probability of BOJ rate hikes in the coming months has

fallen sharply.

One might argue similar policy and political pressures are

prevalent in the United States, and should therefore be pushing

the dollar lower. That's fair, but these dynamics have been at

play for months, so are surely priced in by now. Takaichi has

been in power barely a month.

"The 'safe haven' status is challenging when so many of the

negative shocks are Japan-based," says Steven Englander, head of

G10 FX strategy at Standard Chartered. "The yen is super-low

yielding in real and nominal terms. It takes a lot to overcome

that."

FROM BOTH SIDES

The BOJ's tightening process was already slow and gradual.

It last raised its policy rate in January, doubling it to 0.5%,

meaning Japan's real interest rates adjusted for inflation are

still deeply negative. This is fertile ground for carry trades.

Exchange rates are obviously two-sided, so it is a cruel

twist for yen bulls that the BOJ could be slowing its tightening

process just as the Federal Reserve seems to be doing the same

with its easing plans. As the yen has been the worst-performing

G10 currency in the second half of the year, the dollar has been

the biggest gainer.

A deeper rout in U.S. and global markets in the coming weeks

could unwind some of these yen carry trades and restore the

Japanese currency's safe-haven allure.

On the other hand, with Japan's domestic policy mix being

what it is, maybe that will be more of a challenge this time

around.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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