Why is the Japanese stock market at record highs despite the depreciation of the yen?

Recently, the Japanese economy has been facing a number of challenges, including slowing economic growth and the continued weakening of the yen exchange rate. However, despite the weak economic fundamentalsJapan's stock market is at record highs.The

As of July 10th.The Nikkei 225 has reached 41,831.99 pointsThe

Meanwhile.The yen continues to fall, as of July 10, USD/JPY has broken the 161 mark, meaning that the161.43 yen to the dollarThe

Exchange rate plummeting and stock market surging? What is the reason behind it?
PART.01

Continued depreciation of the yen

The yen has continued to depreciate and since 2022 hasDevaluation 40%. In March this year, the Bank of Japan opened the first interest rate hike in 17 years, but still can not stop the pace of yen depreciation.

Actually, it's not just the yen.Non-US currencies are being devalued globally, only the yen has depreciated more 👇

Reasons for this.U.S. interest rates have remained high, other countries have relatively low interest rates, creating aspreadAs a result, global currencies are almost universally devalued against the dollar.

Coupled with the fact that Japan has been implementing for many yearsnegative interest ratecap (a poem)zero interest rate policy, has raised interest rates only once this year, and the current policy rate is in the 0%-0.1% range, which is too big a difference from the US interest rate, which can easily exceed 5%.
PART.02

Reasons for Japan's Record High Stock Market

In general, in markets with a high percentage of foreign transactions, theExchange rate depreciation can cause more stock market pressureThe

The Japanese stock market, however, has broken away from this gravity and come out with a performance that is contrary to the general pattern. The yen has depreciated by 20% since 2023, theNikkei up 50%The

Why is this? There are mainly the following reasons:

1️⃣ Exporters' profitability increases

Japan is an export-oriented economy and many large companies rely on exports to overseas markets. When the Japanese yen depreciates, the products of these companies become more price-competitive in the international market, thus increasing sales and market share.

At the same time, when these companies convert their foreign currency income back to Japanese yen, they receive more yen because of the exchange rate change, thus increasing their revenue and profit in the local currency denomination. SuchExpected increases in profits tend to drive up the share prices of these companiesThe

2️⃣ Investor behavior

In global capital flows, investors often look for markets with higher returns to invest in. The depreciation of the yen has made the Japanese stock market more attractive to foreign investors with relatively low entry costs.Foreign investors may increase their investments in the Japanese stock market, pushing up share prices.

3️⃣ Central Bank Policy Expectations

The depreciation of the yen is usually associated with loose monetary policies of the Bank of Japan (BoJ), such as quantitative easing or low interest rate policies. These policies are aimed at stimulating economic growth and boosting inflation, which is usually accomplished by lowering borrowing costs and increasing the money supply.

Such an environmentprompting more money to flow into the stock market.This is because of the relatively low returns on bonds and deposits.

4️⃣ Overall economic impacts

The depreciation of the yen has helpedImprovement of overall economic activity and business profitability, especially for export-dependent industries. The expectation of such growth canImproving investor confidence in the stock marketwhich in turn drives up the share price.

5️⃣ Risk aversion

In some cases, global or regional economic uncertainty may lead to a shift of capital from higher-risk areas to markets that are relatively stable or appear to have growth potential, such as Japan.

Even if the yen depreciates.Japan's economic stability and policy support may also attract safe-haven funds.

Therefore.The depreciation of the yen is often seen as a catalyst for a rise in the Japanese stock market, especially for companies and industries that rely heavily on exports. These factors combine to result in the possibility that the Japanese stock market may experience significant gains during periods of yen depreciation.

In summary, the phenomenon of the Japanese stock market reaching record highs is the result of a combination of factors.

The strong performance of the Japanese stock market has also attracted the attention of global investors. Many international investors have flocked to the Japanese stock market.Seeking investment opportunities. At the same time, a number of well-known investment institutions have increased their investments in the Japanese stock market, further boosting the stock market.

As investors enjoy the benefits of a rising stock market, they also need toAttention to risk. Despite the current strong performance of the Japanese stock market, it is likely to face a variety of uncertainties in the future, such asChanges in the global economic situation, policy adjustmentsetc.

If you would like to know more about investing in Japan, please feel free to contact us!