USD/JPY Could Reach 163 if Topix Hits 4,500, Citi Says

The Japanese yen could weaken to ¥163 per U.S. dollar if the country's benchmark Topix stock index surges to the 4,500 level, according to a new analysis from Citi. The firm's current model, based on the stock index's performance, already estimates a fair value for the currency pair at around ¥160 per dollar.

Equity Rally's Impact on the Yen

In a research note released Thursday, Citi analysts explained that historically high levels for Japanese equities have often amplified yen depreciation. This trend is driven by portfolio rebalancing and hedging transactions undertaken by both domestic and overseas investors in response to a rising stock market.

The Topix, or Tokyo Stock Price Index, is a broad market benchmark that tracks all domestic companies listed on the Prime Market section of the Tokyo Stock Exchange, serving as a key gauge of Japanese equity performance.

A Weakening Correlation

The strong link between a rising stock market and a falling yen has become less pronounced since 2024, the bank noted. Citi attributed this shift to two primary factors:

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• The contraction in the monetary policy gap between Japan and other major economies.
• Direct foreign exchange intervention by Japanese authorities to purchase and support the yen.

Analysts also suggested that the current USD/JPY exchange rate already anticipates a degree of continued strength in the Japanese stock market.

Forward-Looking Risks

Despite the loosening correlation, Citi warned that a change to the interest rate spread or a shift in the Japanese authorities' policy on intervention could pose a risk of further yen weakness. The firm recommended that investors maintain continued caution regarding the currency pair.