top of page

Why is Japan's yen falling? Retail investors are one reason Inflows into foreign-stock funds through NISA program add to pressure on currency

The yen remains under pressure after apparent interventions by Japanese authorities to bolster it. (Photo by Satoko Kawasaki)

TOKYO -- Japanese individual investors have emerged as a new factor in the yen's persistent slide, complicating any attempts by authorities to support the currency.

The yen weakened by 1.7% against the dollar in the week through Friday -- by far the worst performance among nine major advanced-economy currencies.

The yen's tumble in value since 2022 has stemmed mainly from the gap between domestic and foreign interest rates, along with a growing trade deficit. But the rate differential has stopped widening for now, and the trade deficit is shrinking.

One notable reason it has continued to fall despite these shifts appears to be the Nippon Individual Savings Account (NISA) program, which was revamped this year.

Net foreign securities investment by individuals through investment trusts topped 4 trillion yen ($25.7 billion) in the first four months of the year, data released Friday by the Ministry of Finance shows -- the largest amount for that period in data going back to 2005.

Foreign-stock funds are the main channel for these flows. Mitsubishi UFJ Asset Management's eMAXIS Slim World Equity Fund logged net inflows of 943.7 billion yen in the first four months of this year, the most for any publicly offered investment trust in Japan, aside from exchange-traded funds.

This fund alone accounted for 18% of net inflows into investment trusts for the period, and it surpassed 3 trillion yen in net assets in April.

Some analysts see the impact of this trend on the currency exceeding that of Japan's trade deficit, which came to 1.8 trillion yen for the January-March quarter.

The yen's gradual weakening may be related to the nature of the NISA program. Investors often put around 10,000 to 50,000 yen into the same funds each month, regardless of how the market is moving.

"Investing in global equity funds means selling yen to buy local currencies," said Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities. "It could be having an impact on lightly traded currency pairs, even if each trade represents only a small share of the whole."

The revival of the yen carry trade -- borrowing yen at low interest rates to buy higher-yielding currencies -- has also played a role in the currency's drop since the early-May end of Japan's Golden Week holidays.

In the options market, one-month dollar-yen implied volatility -- an indicator of expected movement in the currency pair -- has fallen to the 8% range from around 12% in late April. This suggests a reduced perceived risk of losses from exchange rate movements, creating better conditions for the carry trade.

This comes on top of real yen-selling demand from importers, combining to make sellers the dominant force in the market.

The government and the Bank of Japan are believed to have conducted two interventions to support the yen, on April 29 and May 2, totaling around 8 trillion yen. The Ministry of Finance and the BOJ have declined to comment on whether they intervened.

 The fact that the yen weakened again after these spikes in upward pressure shows that "it's difficult to reverse a yen depreciation trend through intervention," said Daiju Aoki, chief investment officer for Japan at UBS SuMi Trust Wealth Management.


bottom of page