Yen Weakens To July 2024 Lows, But Japanese Stocks Have Never Been Stronger

A well-worn market dynamic is resurfacing in Japan, as a weakening yen once again coincides with a powerful rally in domestic equities.

As the Japanese yen slides to its lowest level since July 2024, domestic stocks are doing exactly the opposite—smashing record highs.

Currency Sinks, Stocks Fly: Japan Repeats A Familiar Trade

The yen weakened past the 159 level against the U.S. dollar on Tuesday, pressured by rising political uncertainty and speculation that Prime Minister Sanae Takaichi could dissolve parliament as early as next month.

Takaichi, who maintains strong public approval, is widely viewed as favoring expansionary fiscal policy—an outlook that markets have quickly translated into renewed yen weakness.

At the same time, Japanese equities surged. Futures on the Nikkei 225 rallied 3.1% to close at fresh record highs, extending a rally that has been fueled by exporters and financials benefiting from the softer currency.

Toyota Motor Co. (NYSE:TM), the largest Nikkei component, surged more than 7% in Tokyo trading. Mitsubishi UFJ Financial Group Inc. (NYSE:MUFG), the second-largest holding, gained over 5%.

Since the start of the year, the iShares MSCI Japan ETF (NYSE:EWJ) rose nearly 5%, easily beating the SPDR S&P 500 ETF Trust (NYSE:SPY), which gained about 1.6%.

Is this currency-stock split sustainable? Some experts warn that the mix looks uncomfortable.

Macro Warning Signs Begin To Flash

Economist Mohamed El-Erian highlighted that Japan is experiencing a historically unusual combination for a G7 economy: persistent yen weakness alongside rising bond yields—a dynamic he described as "worrisome" if it continues.

Adam Turnquist, analyst at LPL Financial, tied the yen's slide directly to election chatter.

"The yen has fallen to its weakest level against the greenback since last January amid speculation that Prime Minister Sanae Takaichi may call a snap election," said Turnquist.

Turnquist added markets welcomed the prime minister's pro-growth agenda, even as bonds and the yen struggled since she took office in October. He noted Takaichi favors easier policy while the Bank of Japan raises rates to fight inflation.

That tension matters. As Turnquist highlighted, Japanese authorities stepped in four times in 2024 when the yen weakened toward the 160 area, putting that zone firmly back on traders' radar.

Speculative positioning adds another wrinkle. Turnquist said long yen positions dropped to their lowest since early 2025, while shorts remain elevated, raising the risk of a sharp reversal if momentum breaks.

How far can the yen fall before officials act? Bank of America sees election risk as a near-term driver.

"The potential snap election is likely to become a short-term theme in the yen asset market," said Shusuke Yamada, analyst at Bank of America.

In the short run, markets appear to be pricing in what some have dubbed "Sanaenomics": looser fiscal policy, accommodative monetary conditions, a steeper yield curve—and a weaker yen.

“The market may see further yen weakness and curve steepening unless the report is denied by the administration,” Yamada said.

In the analyst’s view, intervention becomes more likely in the 162–165 range unless yen selling accelerates sharply over a short period.

Longer term, the picture stays murky. The administration has shown pragmatism, balancing growth goals with market stability. Aggressive deficit spending, however, could renew selling pressure on the yen and Japanese government bonds.

“The medium- to long-term impact on the market remains uncertain at this stage,” Yamada said.

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