The significant decline in the Japanese yen is no longer driving the rise of the Japanese stock market.

Over the past two weeks, the 30-day correlation between the Nikkei 225 index and the Japanese yen has mostly been negative, as investors fear that the continued depreciation of the yen may increase import costs and harm consumer purchasing power, thereby affecting the economy.

The 30-day correlation between the Nikkei 225 index and the Japanese yen is negative.

In addition, fund managers are also concerned about whether the Japanese authorities will intervene in the market to prevent the yen from falling further, as a decline in the yen could potentially trigger market turbulence and put pressure on exporters.

Although the depreciation of the yen is good news for companies that sell goods overseas and was a driving force behind the record high of the Japanese stock market earlier this year, the actual return on investment for buyers in dollar terms is very low. This has led foreign investors to net sell stocks for the past five weeks, marking the longest continuous sell-off since March 2023.

Monthly foreign fund inflow into the Japanese stock market

The ROI of the Nikkei 225 Index this year is about 4% in USD terms, far lower than the 15% of the S&P 500 index.

"Investors are increasingly concerned that their weak yen will damage their returns denominated in dollars and euros, leading to more fund outflows from the Japanese stock market," said Amir Anvarzadeh, strategist at Asymmetric Advisors. He said that forex intervention is no longer effective, "unless it is supported by Japan's major policy shift."

Earlier this month, the Bank of Japan postponed its plan to reduce bond purchases until July, surprising the market. Although the Bank of Japan has opened the door to the next month's rate hike, the overnight index swap has not fully reflected the 10 basis points of interest rate hike, highlighting the huge interest rate gap between the Bank of Japan and the Fed.

"As long as the Bank of Japan's action in normalizing monetary policy is slow and ignores wealth losses, this situation will continue," said Anvarzadeh, based in Singapore.

Investors' interest in Japanese stocks has also declined, with investment firm Schroders Plc lowering its rating for the Japanese stock market. The firm's latest investment report, released on Wednesday, said that the weak yen is causing signs of deteriorating confidence among consumers and small businesses.

Despite this, the Nikkei 225 index has risen more than 17% this year when measured in yen, outperforming other major Asian stock indices. Including strategist Rie Nishihara, JPMorgan expects the index to reach 42,000 points by the end of the year, partly due to wage increases and corporate reform. This will be nearly 3% higher than the record high reached in March.

However, Makoto Noji, chief forex and foreign bond strategist at SMBC Nikko Securities Inc., believes that the weak yen is a problem. He wrote in a research report on Thursday, "Given the rise in import inflation and the resulting increase in living costs, the depreciation of the yen cannot be ignored."