Nikkei 225 storms to historic highs: yen weakening fuels Japanese market
Japan's stock market is showing impressive growth: the Nikkei 225 index surpassed the 72,000-point mark on Monday, hitting an all-time high in 76 years. The main driver of this rally is the continued weakening of the national currency—the yen.
Rally amid a weak yen
At the close of Monday's trading session, the Nikkei 225 settled at a record 72,353.96 points, gaining 1.55%. The intraday high even reached 72,831 points. The broader Topix index also followed suit, rising 1.24% to 4,095.05 points. The market capitalization of the Nikkei 225 increased by more than 25.74 trillion yen (about $156 billion) in a single day. The positive sentiment also swept across other Asian markets: South Korea's KOSPI rose 0.7%, and China's SSE Composite gained 1.78%.
The weakening yen continues to play a key role in this scenario. The Japanese currency fell to 161.7 against the dollar, approaching the critical level of 161.96. A break of this zone would signal a new multi-year low, last seen in 1986. This, in turn, would increase pressure on Japanese authorities to conduct currency intervention to support the national currency.
Paradoxes of monetary policy
The situation is paradoxical: the Bank of Japan has tightened monetary policy, raising the key interest rate to 1%—a level not seen since 1995. Typically, such a move strengthens the currency, but in the case of the yen, the effect was the opposite. From late April to late May, Japan spent a record 11.73 trillion yen ($73.6 billion) to support its currency. Meanwhile, Ministry of Finance data showed that Japanese investors reduced their purchases of foreign securities by $75.6 billion over the same period—an amount nearly identical to the size of the latest currency intervention.
My take on the situation: A weak yen is a double-edged sword for Japan's economy. On one hand, it provides a powerful boost to exporters and the stock market, as we are seeing with the Nikkei's records. On the other hand, it undermines the purchasing power of the population and increases inflationary pressure. As long as the Bank of Japan continues to balance between stimulating growth and curbing inflation, the yen is likely to remain under pressure, continuing to fuel the stock market rally. However, any hint of intervention could trigger a sharp correction, and investors should be prepared for that.