The surge in Japanese stocks towards record levels coincides with asset managers increasing their bearish positions on the yen, signaling investor caution regarding currency risks. This article examines the correlation between yen positions and the Topix 100 index, shedding light on international investors’ strategies amidst Japan’s market rally.
The climb of Japanese stocks towards record highs is accompanied by a notable uptick in bearish positions on the yen among asset managers, indicating a cautious stance towards currency risks. According to Bloomberg analysis of Commodity Futures Trading Commission data, the correlation coefficient between yen positions and the Topix 100 index reached -0.56 as of Feb. 13, marking the highest level since 2020.
This correlation suggests a tendency among asset managers to adopt bearish currency positions as Japan’s large market-cap stocks advance. It reflects a scenario where international investors purchase Japanese equities and subsequently hedge against currency fluctuations to mitigate the impact of a weakening yen on their investment returns.
Despite earlier forecasts anticipating a yen rebound in 2024, the Japanese currency has depreciated by 6% against the dollar since the beginning of the year. This movement contrasts with expectations and is attributed to reduced speculation of an imminent Federal Reserve interest rate cut, coupled with the belief that the Bank of Japan, while potentially ending negative interest rates in the near future, will adopt a cautious approach towards further rate hikes.
The cost of hedging against yen depreciation for three months stands at minus 5.6%, indicating that investors taking bearish positions on the currency can yield profits as long as the yen does not strengthen significantly.
As of Monday, the yen traded up 0.2% at 149.94 to the greenback in Tokyo. Wei Li, a multi-asset quant solutions portfolio manager at BNP Paribas Asset Management, expressed a preference for Japanese equities while hedging against currency exposure, anticipating a sustained weakness in the yen.
The Topix 100 index has surged by 14% this year, building upon last year’s 27% rally, which marked the largest gain since 2013. Optimism regarding Japan’s diminishing deflationary pressures has contributed to this rally, with senior officials suggesting that the nation is nearing victory in its battle against falling consumer prices.
The significant increase in global investors’ net buying of Japanese stocks and index futures, reaching ¥8.1 trillion ($54 billion) in mid-January, underscores the heightened demand for Japanese equities among overseas investors. Although purchasing activity has moderated to ¥5.8 trillion in the week ended Feb. 9, it remains robust compared to historical averages.
Yukio Ishizuki, senior currency strategist at Daiwa Securities Co., attributes the yen’s short-term bearish outlook to expectations of a gradual rate hike by the Bank of Japan and delayed rate cuts by the Federal Reserve. He anticipates a test of last year’s lows in the yen, reflecting the prevailing sentiment among market participants.
