Unexplained yen weakness: equity-linked FX hedging a plausible key factor

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Unexplained yen weakness: equity-linked FX hedging a plausible key factor

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Unexplained yen weakness: equity-linked

FX hedging a plausible key factor

Yen selling from outperformance of Japanese equities 15 June 2026

This report examines the impact of FX hedging associated with inward and outward G10 FX Strategy

equity investment on JPY. The conclusion is that yen selling driven by FX hedging in Global

foreign investors’ Japanese equity investment may have been one of the main factors Shusuke Yamada, CFA

behind yen depreciation since last year. Key points are as follows. FX/Rates Strategist

BofAS Japan

+81 3 6225 8515

• Taking into account the improvement in the basic balance, the outperformance of shusuke.yamada@bofa.com

Japanese equities, and associated FX hedging, over the past year yen depreciation

may have reflected strength—particularly in Japanese equities—rather than

weakness in Japan’s fundamentals. However, given the reliance on multiple

assumptions and the lack of direct data on FX hedging, the analysis should be

interpreted as remaining at the level of a hypothesis.

• Fiscal risk premia may also have contributed to yen depreciation, but the

outperformance of Japanese bank equities—alongside a narrowing loan-to-deposit

gap and a flattening of the 10s30s curve—suggests that the rise in interest rates

also reflects a positive dynamic. It is difficult to explain the yen depreciation since

2025 solely in terms of fiscal risk.

• If the outperformance of Japanese equities continues, the yen may remain on a

weakening trend despite improvements in the basic balance.

• However, if the outperformance of Japanese equities comes to an end, yen selling

driven by FX hedging may subside, and the yen may stabilize in line with the