BofA says this is one of the main factors behind yen depreciation since last year

The yen remains under pressure despite improved Japan balance-of-payments data, with Bank of America estimating foreign holdings of Japanese equities at roughly $2.2 trillion as of March 2025. The report argues that equity-related currency hedging, potentially worth several trillion yen, is a key driver of yen कमजोरी and could persist if Japanese stocks keep outperforming. A correction in Japanese equities or further Bank of Japan rate hikes could trigger yen stabilization or a temporary rebound.

Analysis

The key second-order effect is that the yen is behaving less like a macro currency and more like a financing leg for foreign equity exposure. That matters because as long as Japanese equities keep outperforming, the currency drag can persist even if the domestic balance-of-payments backdrop improves; in other words, the flow is now self-reinforcing through hedge maintenance rather than fundamentals.

The asymmetry is in the unwind. A modest correction in Japanese equities could trigger a fast, mechanical bid for yen as hedges are reduced, creating a short, sharp squeeze that is larger than the initial equity move would imply. With positioning already stretched, the near-term risk is not gradual appreciation but a disorderly move over days to weeks if global risk appetite wobbles or BOJ rhetoric turns more restrictive.

For cross-asset positioning, the best expression is not a pure FX directional bet but a relative-value trade tied to Japanese equity beta. Japanese banks and exporters remain vulnerable if hedging costs rise or if foreign inflows slow; meanwhile, any break in the equity trend could hit crowded long-Japan allocations before fundamentals fully roll over. The market appears to be underpricing how quickly hedging flows can dominate when volatility is low and positioning is one-way.

The contrarian read is that the yen may be closer to a tradable low than consensus assumes. If rate differentials have already been absorbed into pricing, then the incremental catalyst set shifts to hedge unwinds, BOJ tightening, and a possible air-pocket in Japanese stocks. That makes downside in yen less attractive here than it looked a month ago, especially versus currencies whose depreciation is still supported by cleaner macro carry.

Key Decisions for Investors

• Go long JPY vs USD via spot or 3-month forwards as a tactical hedge against a Japan equity drawdown; target a 2-3% move with stop-loss if Japanese equities continue to grind higher for another 4-6 weeks.
• Buy short-dated USD/JPY downside structures (e.g., 1-3 month put spreads on USD/JPY) to capture a potential hedge-unwind squeeze; favorable risk/reward if realized vol stays suppressed and BOJ messaging tightens.
• Reduce or hedge unhedged long exposure to Japanese equities (EWJ, DXJ) over the next 2-4 weeks; the cleaner expression is long EWJ / short TOPIX futures if you want to isolate currency/hedge-flow risk.
• Pair trade: long Japanese banks (e.g., 8306/8411 proxies) only against a partial JPY hedge; bank outperformance is vulnerable if yen strength starts to feed back into exporters and broader domestic risk sentiment.
• For global macro books, add JPY calls as a convex hedge against a risk-off equity correction; this is cheaper than buying broad equity protection in the current low-vol regime.