Unexplained Yen Weakness Equity Linked FX Hedging

This report argues that the unexplained weakness in the Japanese Yen since last year is primarily driven by currency hedging activities related to foreign inflows into Japanese equities. The author recommends shorting CHF/JPY in anticipation of a potential BoJ policy shift and a rebalancing of these hedges.

Key Takeaways

• 1.Yen depreciation since 2025 is likely driven by FX hedging associated with foreign investors' Japanese equity outperformance rather than fundamentals.
• 2.The outperformance of Japanese equities and subsequent FX hedging by foreign investors have created a significant, unexplained yen-selling flow.
• 3.A hawkish BoJ hike could trigger yen appreciation by influencing hedge ratios and equity valuations.

Table of Contents

• Yen selling from outperformance of Japanese equities
• Yen weakness beyond BoP flow dynamics
• FX hedging in cross border equity investment
• Yen-selling hedges > yen-buying hedges
• Cross-checking
• Fiscal risk and the yen
• Equity strength potentially behind yen weakness
• Hawkish BOJ hike could be effective
• Risk-off yen spike risk; hedging warranted
• Sell CHF/JPY

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