Weak Yen Hurts Foreign Investment in Japanese Stocks, Bank of Japan Intervention Likely

The weak yen is causing foreign investors to pull away from Japanese stocks, as dollar-based investors experience minimal gains despite the Nikkei 225’s 14% yearly increase. This is due to the yen’s sharp drop to a 34-year low against the US dollar, leading to a decrease in returns for non-domestic investors. The yen’s slide benefits exporting firms, but the Nikkei 225 has still fallen by over 6% since reaching a record high. The yen’s future trajectory relies heavily on the Federal Reserve rather than the Bank of Japan (BOJ), according to Yue Bamba, head of Japan active investments at BlackRock. Bamba predicts that if the Fed avoids interest rate cuts, the yen could weaken to 170 per dollar; however, if the Fed cuts rates, the yen could fall to 130-135. The Japanese government has reportedly intervened twice in recent weeks to stabilize the yen’s deterioration, and Bamba anticipates further BOJ intervention due to the currency’s prolonged instability, which is negatively affecting the nation and household expenditures. Bamba expects the BOJ to potentially increase interest rates in July or October and lessen JGB purchases prior to that move. The BOJ’s governor, Kazuo Ueda, has shown signs of shifting his stance concerning the currency. Meanwhile, hedge funds are speculating on an even weaker yen by purchasing options in the 160-161 range. However, Bamba remains optimistic about Japanese shares in the long run, citing ongoing corporate reforms, heightened domestic investment, and growing wages as key factors sustaining the market.