Strong Japanese stocks put pressure on the yen as risk-aversion logic shifts; the 160 level becomes the new focus

⑴ The continued rise of the Japanese stock market is exerting both direct and indirect pressure on the yen's exchange rate. Commerzbank points out that foreign investors hold about 35% of Japanese stocks, and many positions are accompanied by currency hedging operations. The stock market rally, in turn, creates more demand for selling yen as part of hedging strategies.⑵ As the Nikkei index moves higher amid volatility, overseas investors are increasing forward or options-based hedging positions to lock in stock gains. This practice generates continuous selling pressure in the spot market and is one of the micro-level mechanisms causing the yen to remain weak, even though risk-aversion sentiment has not significantly subsided.⑶ The USD/JPY pair touched an 11-day high of 159.37 during intraday trading, just shy of the 160 level. Market vigilance is rising regarding the possibility of another verbal intervention by Japanese authorities.⑷ Further uncertainty in the Bank of Japan's monetary policy outlook has intensified yen volatility. There is significant divergence in market expectations for the timing of the next rate hike. In the absence of clear guidance, flows from carry trade funds continue to exert downward pressure on the yen.⑸ In the short term, the performance of Japanese stocks and the trajectory of the US-Japan interest rate differential will be the two main variables determining the direction of the exchange rate. If the Japanese stock rally continues and US Treasury yields remain elevated, the effectiveness of support for the yen near the 160 level will face repeated tests.