The Japanese stock market experienced significant gains in 2024, with the Topix index reaching a record high and rising approximately 15%. However, these gains have been largely offset for dollar-based investors due to a substantial decline in the value of the yen. While the Topix surged, dollar-denominated returns were a mere 3% as the yen depreciated roughly 10% against the US dollar. This performance significantly lags behind global counterparts, such as the S&P 500 and the Hang Seng China Enterprises Index, both of which saw gains exceeding 25% in US dollar terms.
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Yen Volatility Impacts Foreign Investment in Japanese Equities
Despite positive factors like increased exporter profits due to the weaker yen and the Bank of Japan’s (BOJ) rate hikes bolstering financial stocks, net foreign investment in Japan remained limited in 2024. The yen’s volatility and weakness have deterred foreign funds, creating headwinds for the broader economy through increased import costs and inflationary pressures.
Japanese Yen compared to US dollar
This trend is expected to persist into 2025, as market participants reduce their expectations for a yen rebound. Recent policy meetings by the US Federal Reserve and the BOJ have raised doubts about the speed at which the interest rate differential between the two countries might narrow, further impacting the yen’s trajectory.
Currency Risk and Investment Strategy in Japan
The challenges posed by the yen’s weakness are highlighted by Amir Anvarzadeh, a Japan equity strategist at Asymmetric Advisors Pte. He notes that existing foreign investments in Japan have yielded disappointing results. Furthermore, the BOJ’s recent signals are exacerbating the situation by contributing to yen depreciation, driving up import costs, and compelling foreign investors to implement more extensive currency hedging strategies to mitigate risk.
This dynamic creates a complex investment landscape for foreign investors interested in the Japanese market. Balancing potential equity gains with the risks associated with currency fluctuations will be crucial for successful investment strategies in 2025. The interplay between BOJ policy, the yen’s performance, and global market trends will continue to shape the outlook for Japanese equities and influence investment decisions.
The divergence between the strong performance of the Japanese stock market in local currency and the diminished returns for dollar investors underscores the significant impact of currency movements on international investment outcomes. Careful consideration of currency risk remains paramount for investors navigating the Japanese market.
