The sharp rise in the yen has triggered a sell-off in Japanese stocks. Strategists say there is still a buffer between the exchange rate and the companies' assumed benchmarks, and the risk of profit downgrades is not significant.

On Monday, the significant rise of the yen triggered a sell-off in the Japanese stock market, yet the yen exchange rate failed to surpass key levels utilized by many companies to formulate profit forecasts, allowing room for a market rebound. Currently, the yen exchange rate is still about 5 yen away from the critical point of 151.49 yen per dollar. This rate represents the weighted average expectation derived from a survey of over 800 companies conducted by the Bank of Japan. Strategists have indicated that this buffer zone should help limit the impact of exchange rate fluctuations on corporate profits, creating space for stock price increases after these companies report their earnings. Hiroshi Tsuji, Chief Strategist at Daiwa Securities, stated, "Unless the yen to dollar exchange rate further rises to around 150 yen, the risk of downward revisions in corporate profit expectations should be minimal." He pointed out that although the uncertainty surrounding the yen's appreciation has pressured the stock market, "fundamentally, the current level of yen appreciation will not harm corporate profits." The Japanese benchmark Topix index fell by 1.1% due to the sharp rise in the yen after the coordinated intervention by Japan and the U.S. Typically, a stronger yen is detrimental to the Japanese stock market, but over the past few months, the correlation between Japanese stocks and the yen has weakened, with investors focusing more on the AI theme. The market increasingly believes that the profit-boosting effect of a weaker yen is unlikely to offset its negative impacts on inflation and foreign investment. This divergence in market behavior was also observed in July: at that time, the yen fell to a nearly 40-year low against the dollar, yet the Japanese stock market remained under pressure, largely due to a significant decline in the AI sector. The correlation between the Topix index and yen depreciation has weakened. Naoki Fujiwara, Senior Fund Manager at Tokyo Shinkin Asset Management, remarked, "The initial rise of the Japanese stock market was not solely driven by yen depreciation." He emphasized that as long as the exchange rate remains near companies' expected levels, it is unlikely to hinder profits, and automakers might witness a reset in sentiment when they release their financial reports. Nonetheless, short-term volatility in the yen exchange rate may continue to suppress market sentiment, as the coordination between Japan and the U.S. has increased the risk of further intervention. Maki Sawada, a strategist at Nomura Securities, indicated that as the benefits of yen depreciation continue and the year-on-year impact of U.S. tariffs gradually fades, export companies are likely to see year-on-year profit improvements. She stated, "Stocks that were sold off earlier due to yen appreciation are expected to attract buying interest again after the earnings reports are released." As of the time of writing, the yen exchange rate is approximately 156.96 yen per dollar. The combination of news regarding U.S.-Japan coordinated intervention and official comments helped the yen quickly strengthen to 157.57 last Friday and briefly touched 155.23 in early trading on Monday, marking its highest level since early May.