Japanese Stock Market Adapts as Weak Yen’s Influence Wanes

The Bank of Japan shocked investors earlier this month by delaying a plan to cut back on bond purchases until July

The yen’s decline has gotten so bad that Japanese stocks are no longer being helped by it. For the most of the last two weeks, there has been a negative 30-day correlation between the Japanese currency and the Nikkei 225 Stock Average. 

This is because investors are concerned about the potential damage that the yen‘s continuous decline could cause to the economy, as it could raise import costs and reduce consumers’ spending power.

Furthermore, investment managers are concerned about probable market intervention by Japanese authorities to halt the yen’s slide, which might lead to volatility and negatively impact exporters.

Although the weak currency helped businesses exporting goods abroad and was a major factor in Japanese stocks setting records earlier this year, returns are poor for buyers who make their decisions on dollars. Due to this, foreign investors have been net selling their shares for the past five weeks, which is the longest run since March 2023. 

The Nikkei 225 Stock Average has gained just 4% in US currency this year, significantly less than the 15% increase in the S&P 500. According to Amir Anvarzadeh, a strategist at Asymmetric Advisors, “investors are growing more concerned about how the weakening yen is hurting their dollar and euro returns, and this is leading to more outflows.” Currency intervention is no longer effective, he said, “unless Japan makes a significant shift in its policies.”

The Bank of Japan shocked investors earlier this month by delaying a plan to cut back on bond purchases until July. Overnight-indexed swaps aren’t even completely pricing in a 10-basis-point increase, underlining the stark difference between BOJ and Federal Reserve rates, even if Tokyo left the door open for a rate hike next month. 

Anvarzadeh, a Singaporean, stated, “As long as the BOJ moves at a snail’s pace and ignores the wealth destruction it will continue.” “This current trend could spark a currency contagion in the region, even though the Fed’s rate cut could help the yen.”

Declining Attitude The demand for Japanese stocks has also declined, with Schroders Plc being the most recent company to lower its investment grade for Japanese stocks. According to its most recent investment report, released on Wednesday, the weak currency is translating into indications of worsening sentiment among consumers and smaller businesses.

Nevertheless, the Nikkei has outperformed its main Asian peers this year, rising more than 17% in yen terms. Rie Nishihara and other strategists at JPMorgan anticipate that the index will approach 42,000 by year’s end, partly as a result of growing wages and business reforms. That would put it nearly 3% over its peak, which was attained in March.

But the weak currency is a problem, according to Makoto Noji, chief foreign-exchange and foreign bond strategist at SMBC Nikko Securities Inc. He stated in a research note on Thursday that it is “no longer possible to ignore the weakening yen in light of the rising cost of living due to imported inflation.”