• Rising Japanese equities are increasing yen-selling pressure as foreign investors boost currency hedges.
  • The dollar hovers near ¥159.28 after touching an 11-day high of ¥159.37 amid BOJ policy uncertainty.
  • Analysts see potential for further yen weakness if hedging activity and equity gains persist.

Equities Rise, Yen Falls

Japan's stock market rally is adding to the yen's woes, according to Commerzbank strategists. With foreign investors holding roughly 35% of Japanese stocks—many of those positions currency-hedged—the recent ascent in equities is prompting investors to increase those hedges, which in turn weighs on the yen.

"The correlation between the Nikkei and dollar-yen has strengthened recently," noted a foreign exchange strategist in Tokyo. "As stocks climb, investors naturally adjust their hedges, selling yen to buy dollars, which exacerbates the currency's decline."

The yen's weakness persists amid uncertainty over the Bank of Japan's policy direction. The dollar was trading near ¥159.28 on Friday, after hitting an 11-day high of ¥159.37 earlier in the session.

BOJ Uncertainty Amplifies Pressure

Market participants are closely watching the BOJ, with expectations of a rate hike at the upcoming July meeting fading. "The BOJ has been cautious, and with inflation still below target, the market is unsure if they will act," said a senior currency analyst in Singapore. "This ambiguity is keeping the yen under pressure."

The combination of rising equities and policy uncertainty could widen the yen's depreciation in the coming weeks. "If the stock market continues to rally, we could see dollar-yen test the 160 level," added the analyst.

Implications for Investors and Exporters

A weaker yen is generally positive for Japanese exporters, as it makes their products cheaper abroad and boosts repatriated profits. However, for foreign investors with hedged positions, the currency movement can offset equity gains. "If you're hedging your Japanese stock exposure, the yen depreciation could eat into your returns," explained a portfolio manager at a European asset manager.

Some market participants see the current trend as sustainable, given the strong earnings outlook for Japanese companies. "The rally has legs, and that means continued hedging demand," said the portfolio manager. "It's a self-reinforcing cycle."

As the yen hovers near multi-decade lows, all eyes will be on the BOJ's next move and whether the government intervenes. "Authorities have warned about speculative moves, but so far, they've held off," noted the FX strategist. "A fast depreciation could prompt action, but for now, the trend is in place."

Correction: An earlier version of this article incorrectly stated that the dollar hit an 11-day high of ¥159.37 on Thursday. The high was actually reached on Friday.