After a brief rebound, the Japanese yen has once again succumbed to a downward spiral. As of mid-September, the yen peaked at a troubling exchange rate of 139.582 yen against the US dollar. However, this was just the beginning of a turbulent journey—as the yen momentarily rebounded to an alarming 153.188, a distance not far from the historical extreme of 161.956. This fluctuation has reignited concerns across markets, prompting questions about whether the yen's depreciation will hit new lows and when it might stabilize.

The rapid depreciation of the yen has caught the attention of Japanese authorities, who have expressed concerns regarding fluctuations in the exchange rate. On October 25, Junji Mitsumura, Japan’s foreign exchange affairs official, stated that the government would remain vigilant concerning market actions, particularly suspecting speculative movements. Yet, while the yen wrestles with weakness, Japan's stock market has shown steady resilience. On Wednesday, the Tokyo Metro had its successful stock market debut, which heralded itself as the largest IPO in Japan for the last six years. The overwhelming response invigorated investor confidence in the Japanese equity market amid turbulence.

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This year has been a tumultuous time for the yen. Having begun the year in a depreciation mode, the yen saw an alarming surge of exchange rates against the US dollar that skyrocketed to 161.956. Following this spike, by July 4, the yen took a nosedive, plunging as low as 139.582. Yet just when it seemed the yen had found a low point, the tide turned again as it weakened. Presently, as the dollar-yen exchange hovers around 151, the yen has recently shown an uptrend, even reaching as high as 153.18—the highest level seen since late July. Such a significant rise has led market experts to believe that this spike through the 200-day moving average of 151.38 could spell further decline for the yen.

The swift fall of the yen has not gone unnoticed by official channels. Katsunobu Kato, Japan's Finance Minister, issued warnings regarding currency speculation that have contributed to the yen's depreciation trajectory. Kato stressed the importance of maintaining stable exchange rates and indicated that the government is closely monitoring market activities, particularly speculative volatility. Notably, during a prior intervention in late July, the exchange rate of the yen crossed 161, resulting in a wave of panic across markets. While the yen’s weakness may benefit exporters, the upside is counterbalanced by rising import costs that squeeze households and retailers—triggering concern among policymakers.

The yen's recent depreciation appears to be largely reactive, influenced significantly by external stimuli. With the US dollar index maintaining above 104 points, the end of September saw strong expectations regarding the Federal Reserve's interest rates, placing stress on the dollar index to test its 100-point support. Additionally, the Bank of Japan's ultra-loose monetary policy, coupled with Governor Kazuo Ueda’s hints at reluctance to raise interest rates hastily, has been interpreted as a factor weakening the yen.

As Helen Given, a foreign exchange trader at Monex, put it, “The yen is treading dangerously, especially with so little likelihood that the Bank of Japan will raise interest rates at next week’s meeting. By the end of the year, it is highly likely that the dollar to yen conversion could nudge towards the 155 mark.” As of October to date, the dollar to yen exchange rate has eroded approximately 6%, which could mark the worst monthly performance since April 2022. Compared to all currencies within the G10, the yen has evidently fallen behind.

In terms of interest rate differentials, long-term Japanese government bonds and US treasury yields both saw declines on Wednesday; notably, the yield on 40-year Japanese government bonds temporarily surged to 2.535%, a peak not witnessed since 2008. However, the pace of increases in Japanese bond yields has not matched that of their US counterparts.

As the yen continues its descent, the Japanese stock market remains surprisingly robust. The Nikkei 225 index recently surpassed 42,000 points, hitting a 34-year high—a reflection of the robust performance of funds tied to the Japanese market. Despite repeated warnings about potential risks issued by fund companies, investors remain undeterred. Nevertheless, by August, the tone shifted abruptly; the Nikkei index experienced a staggering drop of 12.4% on August 5, marking a leading downturn globally. Yet, as apprehensions concerning a market bottom intensified, a remarkable rebound ensued. The Nikkei 225 index vaulted from the lows of 31,156 points back to approximately 40,257 points. Recent market fluctuations notwithstanding, the Nikkei remains firm around 38,000 points. As of October 25, the closing value for the Nikkei 225 stood at 37,913.92 points, reflecting a year-to-date growth of 13.3%—a feat that distinguishes it amidst major global markets.

Notably, Lombard Odier, one of Europe’s largest private banks, has shifted to a bullish outlook on the Japanese stock market, viewing it as a prime investment opportunity. John Woods, the Chief Investment Officer of Asia at Lombard Odier, articulated the sentiment, “I feel Japan is now in a win-win situation.” He speculated that if Vice President Harris were to gain victory, potential abolishment of border taxes could further galvanize the Japanese market. Notably, Lombard Odier raised its rating for the Japanese stock market from neutral to overweight just last week.

This positive sentiment across the stock market has also emboldened initial public offerings (IPOs). The Tokyo Metro's triumphant entry into the market has sent ripples through the Japanese stock landscape. On October 23, Tokyo Metro shares surged by as much as 47% during trading, reaching a prohibitively high opening price of 1,630 yen before scaling to 1,768 yen—exceeding the IPO price of 1,200 yen and driving its market valuation past the ¥1 trillion mark. Closing the day at 1,739 yen, the shares showcased a 42% increase over the issuance price, an exceptional performance that outshined the average 34% rise of other newly listed Japanese stocks this year, adding to momentum in the market. However, on October 25, the shares experienced a drop of 5.46%, closing at 1,609 yen.

Market strategist Huang Senwei from Union Bank has also remarked that the Japanese stock market has captured significant foreign interest in recent years. The yen's depreciation has positively impacted the performance of Japanese export companies. Additionally, Japanese listed firms have made strides in corporate governance reforms and shareholder payouts, indicating an economic shift toward recovery from deflation.

Recent data from the Japanese Ministry of Finance indicates that, as of October 19, foreign investment in Japanese stocks amounted to ¥2.11 trillion for the year. This trend is evident in the latest report from the Bank of Japan, which indicates that the current level of activity in the Japanese stock market is higher than the historical trend. Nonetheless, stock valuations have not shown signs of overheating; the Bank of Japan noted the price-earnings ratio remains at historical average levels. Their statements also cautioned regarding potential market risks associated with the Bank's holding of stocks, which warrants careful observation of asset price developments.