The strength of the Yen appears to be having an effect on domestic equity markets. The Nikkei and Topix are among only a handful of markets that are down over the past 4 to 6 weeks in absolute terms. Japanese equity markets have also underperformed what one would predict based on their historical macro drivers (even after considering FX effects).
Much of the recent index damage has been focused in financials, where worries about Financial Services Minister Kamei’s proposals of a debt moratorium and additional capital raisings continue to weigh on the sector. But the Yen strength has been a key part of the drag on cyclical export sectors which are also a significant part of the index. This type of policy uncertainty and Yen strength has played a key role in cooling foreign investor sentiment towards Japanese stocks since September.
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