Yen Trap: Hidden Currency Risks Behind Japan's Stock Rally

The Nikkei stock market in Japan has seen a spectacular rally, closing at 66,016 yen last week and rising by 31.14% this year, one of the best runs globally.

However, fund managers are pointing out that investors holding Japanese equities should be cautious about the currency implications, as the yen's value has fallen significantly.

The yen fell to a 40-year low despite the Bank of Japan raising its policy rate to 1%, which is still relatively low compared to yields of 4.7% on offer elsewhere.

When Tokyo and Washington intervened to prop up the currency, it jumped over 1% in a single session, but the yen has since settled back near 159 to the dollar, roughly where it began the year.

Nigel Green, founder and CEO of deVere Group, notes that investors buying into Asia need to consider what the local currency is doing underneath their returns, as strong companies, buybacks, and governance reform do not protect against currency losses.