This article outlines the basic relationship between the yen exchange rate and Japanese stocks when long-term government bond yields rise. Higher interest rates tend to support a stronger yen and weigh on stocks, although stock prices may also rise depending on the reason for the increase.
When government bond yields rise, the basic relationship is that government bond prices fall and yields rise. Movements in interest rates also affect the yen exchange rate and stock prices, and changes in the Japan-US interest rate differential can influence demand for and selling of the yen.
When interest rates in Japan rise, the yen may be bought back and move toward appreciation on the view that the Japan-US interest rate differential will narrow. A stronger yen is reported to be a potential factor weighing on the earnings outlook for export companies.
Rising interest rates are generally considered a potential headwind for stock prices because of higher financing costs and a decline in the present value of future earnings. However, stock prices may also rise when higher interest rates are accompanied by an economic recovery or improved corporate earnings, and the impact is said to vary by sector.
Even when interest rates in Japan rise, the yen may not appreciate. In some cases, concerns about fiscal stability may instead lead to a weaker yen, and a triple decline in stocks, government bonds and the yen may occur.
In summary, when assessing government bonds, interest rates, the yen and stocks, it is considered important to examine why interest rates moved, together with the underlying factors.