The progress of the "Spring Fight" negotiations is optimistic, Japan is one step closer to canceling negative interest rates, and Japanese stocks have suffered setbacks and have fallen for five consecutive days.

According to media analysis on Wednesday, Japanese stocks can withstand a slight appreciation of the yen in the short term, but if the yen continues to appreciate sharply, it will put pressure on Japanese stocks.

If the yen appreciates by more than 5% this year, Japanese stocks may "collapse." In particular, when the yen continues to appreciate against the US dollar and other major trading partner currencies, the growth of the Nikkei 225 Index will slow down significantly.

Based on nearly 25 years of data, the Nikkei moves lower when the yen appreciates against the U.S. dollar, and similar observations are made when the U.S. dollar is replaced by a trade-weighted basket of Japan's major trading partners.

The Nikkei has nearly doubled in value over the past five years, while Deutsche Bank's trade-weighted yen has fallen more than 20% in that period. A weak yen is creating a tailwind for Japanese exporters, especially automakers, as their overseas earnings are translated into higher earnings.

Historically, the strength of the yen has also shown a relatively obvious negative correlation with the Nikkei Index.

The analysis points out that the temporary rise in the yen has less impact on the stock market. A key reason for this is that major exporters often assume that the yen level is lower than what we have been accustomed to in the past few years, thus avoiding their reporting of losses. A decrease in revenue resulting from a temporary appreciation of a currency.

However, the possibility of long-term appreciation of the yen should not be underestimated. Japan's real effective exchange rate is currently far below the historical average. This situation is extremely rare, with a probability of less than 2%. This suggests that the yen has room to appreciate significantly in the coming months if the Bank of Japan raises interest rates and the U.S. eases monetary policy as inflation falls.

HSBC believes that the yen is entering a new era of substantial appreciation, driven by the narrowing of the interest rate gap between the United States and Japan, the serious undervaluation of the yen, and the rebound in hedging demand. After depreciating more than 25% over the past three years, the yen will recover in 2024, reaching 136 yen per dollar by the end of the year.

As of Monday, the market expects the Bank of Japan to tighten by 25 basis points this year, while the Federal Reserve may cut interest rates by 90 basis points. The market generally predicts that the exchange rate of the yen against the US dollar will appreciate by about 6% by the end of the year, and USD/JPY will fall back to 139.

In addition, in addition to the trend of the yen, the valuation of the Nikkei Index also suggests that it may face adjustments. The Japanese stock market has a low return on equity and high price and cash flow indicators, making it one of the worst stocks in the global market. Overall, if the Bank of Japan exits negative interest rates and stimulates the appreciation of the yen, the Nikkei's gains over the past two years will face a severe test.