Yen Weakness and Equity Strength: Japan’s Market Dynamics at a Crossroads
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A Report by CYS Global Remit Counterparty Sales & Alliance Unit
The Yen’s Slide and the Prospect of Intervention
The Japanese yen has entered a renewed phase of weakness, with the USD/JPY pair climbing nearly 5% over the past month to levels unseen since January. After months of relative summer stability, the move has reignited market speculation over potential intervention by Japan’s Ministry of Finance (MoF). According to Goldman Sachs, while verbal warnings from the newly appointed Finance Minister have increased, the thresholds for direct market intervention have not yet been met.
Goldman’s analysis points out that intervention by Japanese authorities typically depends on three key conditions: a rapid and destabilizing move in the exchange rate, a clear dislocation from fundamental economic drivers, and intensified verbal signalling from policymakers. So far, the yen’s depreciation, though sharp, remains broadly in line with shifting policy expectations and global yield differentials rather than speculative excess. However, should USD/JPY accelerate toward the 161–162 range, the probability of action would rise meaningfully.
Japan’s authorities have a recent history of currency intervention. In 2022 and again in 2024, the MoF deployed significant reserves to support the yen when volatility reached destabilizing levels. Goldman Sachs estimates that Japan still possesses ample capacity to intervene on a similar scale if needed. Yet, such efforts are usually most effective when global conditions align—specifically, when the U.S. Federal Reserve adopts a dovish stance, the Bank of Japan (BoJ) turns more hawkish, or Japan’s domestic data supports a stronger currency narrative.
At present, these conditions remain only partially fulfilled. The Fed has hinted at the possibility of rate cuts in 2025 but maintains a data-dependent posture, while the BoJ has shifted only gradually away from its ultra-loose policy. The resulting dynamic has kept interest rate differentials—and thus yen pressure—intact. The yen’s recent weakness also reflects shifts in Japan’s fiscal outlook, as rising government debt and long-term yield adjustments have added a “fiscal risk premium” to the currency.
The Evolving Link Between the Yen and Japanese Equities
Traditionally, yen weakness has coincided with surging Japanese equities, driven by the competitiveness boost it provides to exporters. This inverse relationship—strong equities alongside a weaker yen—was especially evident throughout the 2010s. A weaker yen inflated overseas profits when repatriated and supported Japan’s export-oriented corporate earnings, thus fuelling stock market rallies.
However, recent data suggest that this long-established correlation may be breaking down. Analysts at Citi have observed that despite a strong performance in Japanese equities, which have pushed the Nikkei 225 to record highs above 50,000, the yen has not weakened in tandem. In fact, the USD/JPY pair has remained below its 2023 highs, indicating a possible decoupling between the two markets. Citi traces the historical relationship back to the early 2000s when the correlation between the yen and equities shifted from positive to negative. Multiple factors drove this pattern: yen buying by foreign investors during new investments, yen selling upon exit, currency hedging activities, and portfolio rebalancing by pension funds and insurers. Essentially, global capital flows and risk sentiment helped create a feedback loop where equity rallies reinforced yen weakness and vice versa.
Now, this loop appears to be changing. Since USD/JPY dropped from ¥160 to around ¥140 last summer, Japanese stocks have continued their upward momentum even in the absence of renewed yen depreciation. Citi attributes this divergence partly to narrowing short-term interest rate spreads between the U.S. and Japan, as monetary policies begin to move in opposite directions. The Fed’s gradual pivot toward easing contrasts with the BoJ’s cautious steps toward normalization, shrinking the yield differential that has underpinned dollar strength.
Policy Shifts and Market Implications
The narrowing rate spread between the U.S. and Japan is a “necessary but not sufficient” condition for sustained yen appreciation, Citi notes. For a meaningful correction in USD/JPY—potentially to ¥140 or below—there would need to be a broader correction in risk assets globally. In other words, unless global equities experience a risk-off phase, the yen may remain under pressure despite improving rate differentials.
Nevertheless, the current environment presents an intriguing balance. Japan’s equity market strength reflects rising investor confidence in corporate reforms, earnings growth, and governance improvements. At the same time, the resilience of the yen—despite record equity valuations—suggests greater diversification of capital flows and a structural evolution in Japan’s financial markets. Domestic investors, including insurers and pension funds, have become more dynamic in managing foreign exposure, while overseas investors are showing renewed interest in unhedged Japanese assets, reducing yen-selling pressure.
Furthermore, the BoJ’s gradual exit from yield curve control and hints of a more flexible rate policy mark a quiet but meaningful shift in Japan’s macroeconomic stance. As inflation stabilizes around the 2% target, policymakers may find greater room to normalize rates—further reducing the interest rate gap with the U.S. and potentially supporting the yen.
In this context, direct intervention by Japan’s MoF would likely be a last resort, reserved for sharp, speculative moves rather than steady depreciation. Both Goldman Sachs and Citi’s analyses point to a more nuanced market phase—where structural, policy-driven, and sentiment factors interact more complexly than in previous yen cycles.
Outlook: The Next Phase for USD/JPY and Japanese Markets
The coming months will hinge on two key developments: the Fed’s rate trajectory and the BoJ’s policy recalibration. If U.S. inflation moderates further, leading the Fed to ease in 2025, the downward pressure on USD/JPY could intensify—especially if Japan’s rates continue to edge higher. Conversely, any resurgence in global risk appetite without BoJ tightening could keep the yen subdued and maintain its role as a funding currency in global carry trades.
Citi’s projection that USD/JPY could fall to ¥140 or below “over the next several months” reflects an expectation that the narrowing rate differential will eventually assert itself. Yet, as both banks highlight, market timing depends as much on shifts in global risk sentiment as on policy fundamentals.
Ultimately, Japan’s situation captures a delicate transition: from decades of deflation and ultra-loose policy to a new era of cautious normalization and structural resilience. The divergence between yen behaviour and equity performance signals not weakness, but maturation—a market less beholden to old correlations and increasingly driven by domestic confidence and global integration.
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