The Japanese yen's sharp appreciation on Monday sparked a sell-off in the country's stock market. However, the currency has not yet breached a key level that many companies use to formulate their earnings forecasts, leaving room for a potential market rebound.
Currently, the yen is trading about 5 yen away from the 151.49 yen per dollar threshold, which represents the weighted average exchange rate expectation derived from a Bank of Japan survey of over 800 firms. Strategists suggest this buffer zone should limit the impact of currency fluctuations on export-oriented companies' profits, allowing for potential share price gains after earnings reports.
Why the buffer zone matters
"Unless the yen strengthens further to around 150 yen against the dollar, the risk of downward earnings revisions should be limited," said Yugo Tsuboi, Chief Strategist at Daiwa Securities. He noted that while uncertainty over the yen's appreciation space is weighing on the market, "from a fundamental perspective, the current extent of the yen's rise should not damage corporate earnings."
The broader Topix index fell 1.1% following the yen's surge, which was amplified by coordinated intervention from Japanese and U.S. authorities. A stronger yen is typically negative for Japanese equities, but the correlation between the two has weakened in recent months as investors shift their focus to the artificial intelligence theme. There is also a growing consensus that the profit-boosting effect of a weaker yen is insufficient to offset the negative impacts of higher inflation and reduced foreign buying.
This divergence was evident in July, when the yen fell to near 40-year lows against the dollar, yet the Japanese stock market remained under pressure due to a sharp decline in AI-related stocks.
Correlation with yen weakens
"The initial rally in Japanese stocks was not solely driven by yen depreciation," said Naoki Fujiwara, Senior Fund Manager at Tokyo Shinkin Asset Management. He argues that as long as the exchange rate stays near the levels companies have assumed, it is unlikely to drag down earnings. This could trigger a "reset" in sentiment when automakers report their financial results.
Nevertheless, the yen's recent volatility may continue to pressure market sentiment in the short term, as the coordinated intervention by Japan and the U.S. heightens the risk of further currency action. Maki Sawada, a strategist at Nomura Securities, suggested that export companies' earnings are likely to improve year-on-year, as the benefits of a weaker yen persist and the year-on-year impact of U.S. tariffs gradually fades. "Stocks that were sold off due to yen appreciation are expected to attract buying interest again after earnings are announced," she said.
As of the time of writing, the yen was trading at around 156.96 to the dollar. Following the coordinated intervention and official comments, the yen strengthened sharply to 157.57 on Friday and touched 155.23 in early Monday trading, its highest level since early May.
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