Citi Warns of Sharp Yen Strength if TOPIX Corrects

Citi strategists predict that a deeper correction in Japanese equities could lead to a sharp decline in USD/JPY, but only if the broader TOPIX index falls significantly. Since 2024, the yen has strengthened more rapidly when TOPIX declines by over 10%. A TOPIX correction towards 3,600 would be necessary for such a move to occur.

The relationship between Japanese stocks and USD/JPY is complex, with both a weaker yen supporting exporters and rising equities generating transactions that put downward pressure on the currency. Elevated stock-market volatility has made this connection more visible, with equity gains exerting stronger downward pressure on the yen.

The sensitivity of USD/JPY to Japanese stocks has declined since 2025, partly due to the narrowing monetary-policy gap between the U.S. and Japan. This shift has provided underlying support for the yen and limited the currency impact of rising Japanese shares.