Foreign investors in Japanese stocks may increase FX hedging, potentially intensifying yen selling pressure.

Gelonghui, September 24 — JPMorgan stated that foreign investors may increase the foreign exchange hedging ratio for purchasing Japanese stocks, potentially triggering yen selling. It noted that foreign investors have been consistently buying large amounts of Japanese stocks over the past few quarters, though the foreign exchange hedging ratio remains at a relatively low level of around 10-20%. Considering the recent rise in Japanese equities, if more traditional medium- to long-term investors return to hedged Japanese equity funds, this ratio could increase, acting as an overlooked bearish catalyst for the yen. A normalization increase of 1% in the foreign exchange hedging ratio might trigger approximately JPY 3 trillion in USD/JPY buying, potentially pushing USD/JPY up by 2.8.