Why is the Nikkei 225 surging even as a soaring yen threatens Japan exporters?

Japan’s Nikkei 225 rebounded on Friday as easing fears of an imminent US rate increase helped technology shares recover, even as a sharp rally in the yen created a fresh headwind for exporters.

The benchmark was up 0.86% at 64,769.74 by the midday break, snapping a four-session slide that had erased almost 2,200 points.

SoftBank Group was the biggest driver, while MSCI’s Asia-Pacific index outside Japan rose 1%, China’s CSI 300 gained 1% and South Korea’s Kospi added 1.1%.

However, the Nikkei remained down 2.7% for the week.

Nikkei rebounds, but the rally is unusually concentrated

The Nikkei’s recovery gathered pace through the morning as lower US bond yields and Thursday’s Wall Street rally encouraged investors back into growth and technology shares.

SoftBank Group jumped more than 10% by the midday break and contributed roughly 414 points to the Nikkei’s 555-point rise. Fast Retailing and Kioxia were also among the largest positive contributors.

The concentration matters. More stocks on the Tokyo Prime market were falling than rising around midday, suggesting the rebound was not yet a broad risk-on move.

The recovery also followed four consecutive declines, leaving room for bargain hunting after recent pressure from higher global yields.

Yen surge adds a new test for Japanese stocks

The bigger complication for Tokyo equities is the currency.

The yen has gained roughly 2.6% this week and traded near 155.7 per dollar on Friday, close to levels reached after the joint Japan-US intervention in July.

A stronger yen can weigh on exporters by reducing the value of overseas earnings when translated back into Japanese currency.

MUFG strategist Michael Wan noted in the bank’s Friday research that the yen had strengthened from around 160 to as high as 155.30 within two sessions.

Bank of Japan current-account data did not clearly point to fresh intervention, leaving monetary-policy expectations as an important part of the move.

The Wall Street Journal cited JPMorgan Private Bank strategist Yuxuan Tang as expecting three to four BOJ increases over the next year, potentially taking the policy rate towards 2%.

Fed repricing and payrolls could decide the next move

The immediate catalyst for Friday’s rebound came from the US.

Federal Reserve Governor Christopher Waller said recent data showed signs of disinflation and indicated he could support leaving rates unchanged in September if that trend continues.

Markets cut the implied probability of a September increase to around 50%, from roughly 63% a day earlier.

Treasuries rallied after the comments. The two-year yield held near 4.34%, while the 10-year yield was around 4.76%, easing some of the valuation pressure that had hurt technology shares globally.

ING senior rates strategist Benjamin Schroeder said in comments reported by The Wall Street Journal that recent Fed communication had made the coming payroll and inflation data more important to the September decision.

That leaves Friday’s US jobs report as the next test. Economists expect payrolls to rise by about 56,000 after a 23,000 decline the previous month, with unemployment seen holding at 4.1%.