Which exerts a stronger influence on the USD/JPY exchange rate, stock prices or interest rates? [Nijiro Ota]

Profile of Jiro Ota

Jiro Ota. FX strategist. Began FX trading in 1979 at The First National Bank of Boston Tokyo Branch. Later worked in corporate foreign exchange at Manufacturers Hanover Trust Bank, BHF Bank, National Westminster Bank, and ING Bank. Subsequently engaged in retail FX, working in the U.S. GFT Tokyo branch, later gaining experience as a market strategist, and is currently active as an individual investor.

*This article is a reprint/edited version of an article from FX攻略.com July 2019 issue. Please note that the market information written in the text may differ from current market conditions.

A stronger yen lowers stock prices; a weaker yen raises them

When considering the forex market, I also watch the stock market and the bond market together. In the Japanese stock market, many participants may base their decisions on the correlation with the dollar/yen exchange rate, such as stock prices falling when the yen strengthens, and rising when the yen weakens.

Indeed, for major exporters and consumer-exporting large companies in Japan, if they earn in dollars, a weaker yen increases the amount received in yen, while a stronger yen reduces it. If performance reflects this straightforwardly, the view that “yen weaker = higher stock prices” and “yen stronger = lower stock prices” can be understood.

For foreign investors who hold large amounts of Japanese stocks, investing in yen-denominated assets is advantageous based on their home currency, so they tend to favor a stronger yen. However, offshore institutional investors and pension funds may adjust by selling Japanese stocks when the yen strengthens, and buying when the yen weakens, to maintain the balance of yen assets in their overall portfolios.

Among foreign investors who engage in mid- to long-term investment, when investing in Japanese stocks, it is common not to hedge currency risk. Because investment results are evaluated in dollars, the dollar-based Nikkei Stock Average may reflect sentiment toward Japanese equities abroad.