(Bloomberg) -- The rally in Japanese stocks toward record highs comes as asset managers increased bearish positions on the yen to the most in more than a year, suggesting investors remain cautious about currency risks.
The correlation coefficient between the yen positions and the Topix 100 stood at minus 0.56 as of Feb. 13, the most since 2020, based on Bloomberg analysis of data from the Commodity Futures Trading Commission.
This indicates currency positioning among asset managers has tended to shift in a bearish direction when the nation's large market-cap stocks have risen.
The Japanese currency has dropped 6% against the dollar so far this year, moving contrary to forecasts that it's set to rebound in 2024. The yen's depreciation erodes returns from the Japanese stock rally in US currency terms for global investors, who may be shifting funds away from China's sluggish equities and into Japan's market.
The yen has been weak on growing expectations that even if the Bank of Japan raises interest rates for the first time since 2007 in coming months, it won't rush to lift rates further.
“We favor Japanese equities,” said Wei Li, a multi asset quant solutions portfolio manager at BNP Paribas Asset Management. “We hedge the currency” for the stock positions on the view that the yen will probably remain weak, he said.
Three-month costs to hedge against a depreciating yen are minus 5.6%, indicating investors who take bearish bets on the currency can earn profits as long as the yen doesn't strengthen significantly.
The Topix 100 index has climbed 14% this year, adding to last year's 27% rally which was the biggest since 2013. The gauge has reached its highest level since 1990 due in part to optimism that Japan's deflation is coming to an end, with a senior Japan Cabinet Office official saying that the nation is at the final corner before declaring victory over falling consumer prices.
The 52-week moving sum of global investors' net buying of Japanese stocks and index futures climbed to ¥8.1 trillion ($54 billion) in mid-January, the most in exchange data going back to 2015. Though purchases have slowed to ¥5.8 trillion in the week ended Feb. 9, that's still far stronger than the average of ¥2.4 trillion selling since 2015.
“When Japanese equities rise, demand grows by overseas investors to sell the yen to hedge their gains in stocks,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. “The yen's short-term outlook seems bearish due to speculations the BOJ's rate hike will be slow and gradual while the Federal Reserve's rate cut will come in later than previously expected.” A test of last year's lows in the yen is in sight, he said.
--With assistance from Winnie Hsu and Saburo Funabiki.
More stories like this are available on bloomberg.com
©2024 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.