Japan's Nikkei 225 crossed 59,000 for the first time on Thursday, setting a new record high. If you're a U.S. investor who doesn't follow international markets, you might be wondering why you should care. Here's why: currency effects and capital flows don't stop at borders.
The rally is being driven by what traders are calling the "Takaichi trade"—speculation around potential central bank board appointments and monetary policy shifts. Sanae Takaichi, a former Japanese minister known for her pro-stimulus stance, is rumored to be gaining influence over Bank of Japan policy decisions. Markets love easy money, and the Nikkei is pricing in the possibility of continued accommodation.
But here's the part that matters for your portfolio. When Japanese stocks rally while the yen stays weak, it creates a feedback loop. Foreign investors buy Japanese equities, which pushes the Nikkei higher. A weaker yen makes Japanese exports more competitive, which boosts corporate earnings. Those higher earnings justify the rally, which attracts more capital. Rinse, repeat.
The yen has been trading near multi-decade lows against the dollar, which is why Japanese exporters like Toyota, Sony, and Panasonic have been minting money. Every dollar of revenue they earn abroad translates to more yen when they bring it home. That currency tailwind is a huge part of why the Nikkei is outperforming.
Now, why should U.S. investors care? Two reasons. First, currency divergence creates opportunities. If you own Japanese stocks or Japan-focused ETFs, you're not just betting on corporate earnings—you're betting on the yen staying weak. If the Bank of Japan pivots toward tightening, the yen could strengthen fast, and that currency gain would eat into your dollar-denominated returns.
Second, capital flows are global. When Japanese pension funds and insurance companies look at domestic bond yields near zero, they have to put money to work somewhere. A lot of that capital ends up in U.S. Treasuries and equities. If Japanese stocks keep rallying, some of that capital could rotate back home. That means less buying pressure on U.S. assets.
The Takaichi trade is also a reminder of how much central bank policy drives markets. The Federal Reserve, the European Central Bank, and the Bank of Japan are all navigating different inflation and growth dynamics. When one of them shifts course, it creates ripples across global markets. Japan keeping rates near zero while the Fed holds at 5% creates a yield differential that drives capital flows. Those flows move currencies, which move stock prices.
For U.S. investors, the easiest way to get exposure to Japanese equities is through ETFs like EWJ (iShares MSCI Japan) or DXJ (WisdomTree Japan Hedged Equity). The key difference is currency hedging. EWJ gives you pure exposure to Japanese stocks and the yen. DXJ hedges out the currency risk, so you're only betting on corporate earnings.
Which one should you own? If you think the yen will stay weak or weaken further, EWJ is the better bet—you get the equity upside plus the currency tailwind. If you think the Bank of Japan might tighten policy and the yen could strengthen, DXJ protects you from that reversal.
The bigger lesson is that monetary policy divergence creates opportunities. Japan is running ultra-loose policy while the U.S. is holding rates steady. Europe is somewhere in between. Those differences create arbitrage, carry trades, and capital flows that matter even if you never touch a foreign stock.
The risk is that the Takaichi trade is speculative. If the Bank of Japan doesn't appoint pro-stimulus board members, or if they signal a shift toward tightening, the Nikkei could reverse fast. Japanese stocks are priced for continued easy money. If that narrative breaks, the correction will be sharp.
For now, the trend is clear. Japanese equities are outperforming, the yen is weak, and foreign capital is flowing in. If you're underweight international exposure and looking for diversification, Japan is worth a look. Just understand that you're not just buying stocks—you're buying a currency view and a central bank bet.
