International Funds are Actively Trading Japanese Stocks

Japan has been the weakest major currency in the past month. Besides the rising market optimism over trade negotiation and Brexit which reduced demand for safe-haven assets, increase in the trading of Japanese stocks by overseas investors has been another notable factor weighing on the yen. The mechanism behind this is international funds are actively trading Japanese stocks, yet unwilling to bear the associate currency risks.

Most of the players trading on the Japanese stock market are international hedge funds, and their connecting of equities to the JPY has a significant impact over the currency rate. Due to its high liquidity and well-established market infrastructure for high-frequency trading, Japanese stock market has become a favored ground for short-term trading.

Currently, oversea funds‘ share in Japan’s stock trading has climbed to its highest since 2005, accounting for over 60% of the total trade volume. Such dominance is even more obvious in derivatives, in which oversea funds account for nearly 80% of the total trade volume. Oversea investors would try to avoid taking equity risk and currency risks at the same time. When the stock market easily moves by 10% or 20%, currency hedging needs to be raised or reduced accordingly.

Notably, the increase in overseas trading of Japanese stocks and the related currency hedging is showing an implication on another long-running theme - the inverse relation between the yen and the Nikkei 225 Stock Average. According to the statistics compiled by Bloomberg, the yen and the Japanese stocks remained negatively co-related for most of the time since 2006, with the trend approaching a record high since November, 2007.