How will adjustment in Japanese stocks impact the USD/JPY?

Citi strategists say a deeper correction in Japanese equities could push USD/JPY lower, but a meaningful and sustained yen recovery likely requires a much larger drop in Japanese stocks. The piece highlights that record highs in Japanese shares have supported yen weakness through portfolio rebalancing and currency-hedging flows from domestic and overseas investors. While the Nikkei 225 has already pulled back, the broader TOPIX remains elevated near 4,000, so the current adjustment is not enough to materially change the currency trend. Citi notes that since 2024, yen strength has tended to accelerate when TOPIX falls more than 10%; a decline toward 3,600 could therefore trigger a sharper USD/JPY decline. However, the bank says USD/JPY’s sensitivity to Japanese equities has diminished since 2025 as the U.S.-Japan rate gap narrowed, limiting the currency impact for now.