A stubbornly strong yen appears to be vanquishing hopes among investors for a second rally in Japanese stocks this year.
The sharp fall in Japan’s currency late last year had been a major factor in the 80% surge in the Nikkei Stock Average through May, as the dollar rose more than 30% to a high of ¥103.74. But stocks have been lackluster since falling into a bear market—defined as a 20% drop from a peak—in June. Stocks have recovered somewhat but the Nikkei is still down 9.8% from its May 22 high, largely mirroring the movement of the dollar against the yen.
Friday’s 2.8% tumble in the benchmark index, putting it at 14088.19, was typical of the market’s recent woes, with stocks falling as the greenback slid below ¥97. “The whole weak-yen, strong-stock market trading model which had been counted on to fuel higher and higher stock prices has unwound,” said Sumitomo Mitsui Banking Corp. strategist Daisuke Uno. He sees the dollar as low as ¥90 to ¥92 by the end of December, and the Nikkei trading at around 12500 as a result.