A rare and potentially significant macroeconomic signal has emerged from Japan, as the long-standing negative correlation between the Japanese yen and domestic equities has flipped positive for the first time since 2005. Analyst Alex Mason highlighted that the 1-year rolling correlation between the Topix stock index and the JPY/USD exchange rate moved into positive territory around February 2026, indicating a regime where both the yen and stocks are rising together.
This breaks the decades-old pattern underpinning the yen carry trade, where a weaker yen typically supported Japanese stocks. Mason notes that over the last 12 months, the yen strengthened about 1% against the dollar while Japanese equities rallied roughly 38%. This alignment of currency strength and equity gains often signals direct capital inflows into the equity market itself, rather than investors merely chasing a cheap funding currency. Historical parallels, such as Japan's expansion from 1982 to 1990, suggest such patterns can appear during structural bull markets.
Concurrently, the yen faced significant pressure from fundamental data. The GBP/JPY currency pair surged approximately 0.8%, driven by a combination of robust UK economic data and softer-than-expected Japanese inflation figures for March 2025. UK services PMI hit 54.2, manufacturing output grew 0.7% month-over-month, and retail sales increased, bolstering the British Pound. Meanwhile, Japan's core CPI (excluding fresh food) rose just 2.1% year-over-year, missing the 2.3% forecast and marking the third consecutive month of deceleration.
The softer Japanese inflation data reduces urgency for the Bank of Japan to aggressively tighten monetary policy, undermining yen support. This fundamental divergence with the UK—where strong data reduced expectations for Bank of England rate cuts—created a "perfect storm" for yen weakness against Sterling, according to market analysts. The event underscores Japan's central role in global liquidity, with potential ripple effects on risk allocation across Asia and beyond.
