Pumping Up the Yen?

To hear pundits tell it, Japan’s yen needs a personal trainer. The super-weak currency now hovers around 40-year lows despite Bank of Japan (BoJ) rate hikes and currency market intervention earlier this year. Policymakers and CFOs there are nervous, which bucks the conventional wisdom holding a weak yen benefits Japan, Inc. The circumstances also defy long-running maxims about currency weakness being a proxy for investors losing confidence in a country. Let us take a look.

We start with an interesting observation: Notwithstanding a summer pullback, which coincides with the broader semiconductor freakout, Japanese stocks are having a great year. Through Thursday’s close, the MSCI Japan Index was up 15.7% in US dollars, beating the World’s 10.4%.^[i] Japan’s famously stock-loving domestic investors are buying, but so are international institutions and individuals. Per the Tokyo Stock exchange, foreign flows into Japanese stocks hit a record in 2026’s first half. So this is not a case of a currency weakening because money is fleeing, a la Turkey and Argentina during past crises.

Rather, you could call it a crisis of confidence. When foreign investors buy Japanese stocks, some of them hedge for currency risk. The derivatives contracts they use put selling pressure on the yen. So bizarrely, the more Japan’s strong market and bright fundamentals attract international buyers, the worse it can be for the yen. Meanwhile, the US dollar strengthened against most major currencies as expectations for Fed policy shifted from rate cuts to rate hikes. While the Bank of Japan (BoJ) is hiking short-term rates, US rates are higher in absolute terms, and money generally flows to the highest-yielding asset. So between hedging and rate-chasing, the yen fell under pressure.

Those with a keen interest in Japanese economic history may recall that when the late Shinzo Abe became prime minister in late 2012, a weak yen played into his “three arrows” economic policy. Those arrows were structural economic reforms, fiscal stimulus and bigtime monetary easing. A weak yen may not have been an explicit goal, but it was a logical consequence of monetary easing, which took short- and long-term Japanese rates below zero and far below most other major economies’. Policymakers were fine with it, because Japan is an export-heavy economy. When the yen is weak, exporters can cut prices to raise market share or hold them constant and reap big profits from currency translation. The latter largely won out. It didn’t translate into big investment and production increases back home, but earnings were nice.

Yet that period also showed weak currencies’ downsides, which is that they make imports more expensive. That adds costs for businesses importing raw materials and components, and it hurts households. Japan imports much of its energy, and energy is priced globally in US dollars. So a weak yen means Japan pays more for fuel and natural gas.

No one seemed to mind this much when Japan was trying to bust out of deflation, but the BoJ won that war years ago. Now Japan has consistent modest inflation, making pricier energy more of a sore spot, a chief reason why so many onlookers presume the yen needs to get pumped up. Mostly it is a political issue, which new Prime Minister Sanae Takaichi is trying to tackle with cost-of-living measures in the next budget. But with CFOs griping about the difficulty of currency hedging as the yen slides (necessary to smooth near-term currency volatility’s effects on earnings) and rate hikes seemingly ineffective, the government is now mulling another round of intervention to put a floor under the yen—yentervention, if you will.

As usually happens when Japan mulls rate hikes or yentervention, some pundits warn there will be knock-on effects for US stocks. There is this long-running belief in finance circles that investors borrow in yen to invest in higher-yielding assets internationally. So if the yen strengthens, that will allegedly unwind this “carry trade” and force investors to sell US stocks and pay back their yen-denominated loans. (This was probably true for a spell around 20 years ago, but not recently to any material degree.) This caused a tantrum in US and Japanese stocks in mid-2024, but it eased quickly and the fear proved false.

We doubt it would bite harder this time. Not only has the carry trade always seemed rather overstated, but yentervention usually fails. Policymakers tried it earlier this year. The yen stabilized for a hot minute, then started creeping downward again as market forces regained control. Global economic history has shown, repeatedly, that you can’t have free capital movement, an independent central bank and a fixed (or effectively managed) exchange rate. All yentervention can do is add Japanese government yen purchases to the big pot of soup that is the international forex market. A coordinated global move to help the yen, which isn’t out of the realm of possibility, might have a longer-lasting effect but wouldn’t be permanent.

So we have a suggestion: Don’t sweat it. The weak yen is really a matter of international financial plumbing, not a market driver for US or Japanese stocks. Again, Japanese stocks are up and beating the world in both yen and US dollars this year. Part of this stemmed from investors seeking to diversify Tech holdings beyond the US, Korea and Taiwan, which is why Japan got caught up in the memory chip freakout that began a month ago. But Japanese stocks have plenty else going for them. Financials there benefit from the steeper yield curve as monetary policy normalizes. That also spurs more bank lending, which helps Industrials and other value-heavy sectors. And Takaichi seems to be hoping to pick up where Abe left off on the reform front, with efforts to streamline the budgeting process (ending the patchwork quilt of supplementary budgets any time the government wants to enact stimulus) and tweaking corporate governance reforms to improve their efficacy. The devil is always in the details, but the efforts are raising confidence in Japanese markets, which helps animal spirits grow and thrive.