Market moves on Thursday highlighted this relationship: the Nikkei 225 Stock Average tumbled the most in more than a month, as growing speculation the Bank of Japan will end its negative-rate policy at its March 18-19 meeting caused the yen to strengthen against the dollar.
The rise in so-called beta, which measures how much the Nikkei is affected by yen moves, climbed this week to the highest since January 2022. That means a 1% gain in Japan’s currency could trigger a drop of about 2% in the blue-chip index, Bloomberg-compiled data show. Correlation between moves in the yen and Nikkei is also the highest since May last year.
The Nikkei’s advance has stalled since a world-beating rally pushed the gauge above 40,000 for the first time ever this week, and its increased correlation with the yen helps explain the sluggish turn of Japan’s equity market.
Yen gains that weigh on exporter earnings may have more room to run as inflation and wage data, combined with some BOJ officials being said to favour an early move, suggest that the first rate hike since 2007 is imminent.
“It really is pathetic that a small move in yen-dollar could unhinge momentum trades likes this,” said Amir Anvarzadeh, a strategist at Asymmetric Advisors. “Let’s hope the market breadth expands enough to absorb selling potential” in Japanese companies that benefit from the yen’s weakening, he said.
Bearish yen wagers held by hedge funds and asset managers combined increased to the most since April 2022 based on the data from the Commodity Futures Trading Commission.
Unwinding of these positions would accelerate gains in the Japanese currency, which is expected to strengthen to 139 against the dollar by the end of 2024, according to analyst estimates compiled by Bloomberg.
“There is room for the market to price in more rate hikes, depending on the BOJ’s comments post-normalisation and what happens” with spring wage negotiations, Joey Chew, head of Asia FX Research at HSBC Holdings Plc, wrote in a research note.
“If this happens at a time when hawkish re-pricing of the Fed is deemed largely over,” the yen could rally further considering that short yen speculative positions are now at extreme levels, he said.
Some investors are betting the yen will stay weak even after the BOJ tweaks policy. BlackRock Inc expects the BOJ to start normalising policy as early as March, but says any change is likely to be moderate and accommodative.
Yen gains that would come from a modest rate hike will have limited impact on companies’ earnings, according to the world’s biggest asset manager.
“The dollar has started to lose its momentum and the prospect for the BOJ rate hike in March could bring the yen a little higher and prompt investors to shift from exporter stocks to domestic demand-driven stocks,” said Naka Matsuzawa, chief strategist at Nomura Securities Co.
“That said, considering that FX market volatility remains low and the timing of a Fed rate cut is uncertain, the upside of the yen is limited.”