Synopsis: Japan’s yen has slipped past 163 to the dollar, its weakest level in roughly four decades, after a much wider trade deficit reignited bets that the Bank of Japan will keep raising rates. The last time this playbook ran, in August 2024, it wiped out Rs. 15 lakh crore of Indian equity value in a single session. The question now is whether that scene is about to repeat and how much of a threat it really poses to Indian markets this time.
Japan has spent close to three decades running interest rates near zero, and for just as long, that cheap yen has quietly funded a huge share of global risk-taking. Traders borrow yen for almost nothing, convert it into dollars or rupees, and park it in higher-yielding assets abroad. It’s a trade that works beautifully right up until the currency it’s funded in starts moving the wrong way, and that’s roughly where things stand today.
What’s the news?
Japan’s Ministry of Finance reported a June trade deficit of 406.9 billion yen, more than three times the roughly 120 billion yen economists had expected. Imports grew 25.4% year-on-year, driven largely by costlier crude oil and LNG, while exports grew a slower 19.3%.
That gap between import and export growth is the kind of imbalance that keeps pressure on the currency, and the yen responded by falling past 163 to the dollar, a level last seen in the mid-1980s.
The Bank of Japan had already raised its policy rate to 1% in June, a three-decade high for Japan, and reports now suggest officials are open to moving faster than the market had priced in.
That’s the part investors elsewhere in the world are watching closely, because a faster pace of BoJ hikes, combined with a yen that’s already under pressure to reverse, is exactly the combination that triggered the August 2024 shock.
The August 2024 Precedent
The last time this happened, the move was swift and brutal. Between late July and early August 2024, the yen strengthened from around 162 to 153 against the dollar in about two weeks after the BoJ delivered a rate hike investors weren’t fully braced for.
The Nikkei 225 fell more than 20% over that stretch, including its worst single session since the 1987 crash. The shock didn’t stay contained to Japan. India’s Sensex fell 2.7% and the Nifty 50 dropped 2.68% on August 5, 2024 alone, erasing roughly Rs 15 lakh crore of investor wealth in a single day, as foreign portfolio investors pulled out more than Rs 10,000 crore to cover positions elsewhere.
What made that sell-off so sharp wasn’t really about India’s own fundamentals. It was leveraged money unwinding all at once, with forced sellers liquidating whatever was liquid rather than whatever was weak, and Indian equities happen to be among the more liquid emerging-market assets a global fund can offload quickly when it needs cash fast.
How India Gets Pulled In
Japanese foreign portfolio investors directly hold around Rs. 1.94 lakh crore in Indian equities today, down from roughly Rs. 2.2 lakh crore in mid-2024, and that works out to about 2.7-2.8% of total foreign equity holdings in the country.
On its own, that’s not a huge number. The bigger exposure runs through global macro and hedge funds that borrow yen to fund positions across many markets at once, India included, and that money doesn’t show up neatly labelled as “Japanese” in the flow data even though it’s yen-funded.
There’s also a corporate angle that gets less attention. Some Indian companies and infrastructure entities have raised money through yen-denominated external commercial borrowings or Samurai bonds to take advantage of Japan’s ultra-low rates.
If the yen strengthens meaningfully against the rupee, those borrowers without currency hedges in place would face a higher rupee cost when it comes time to service that debt.
What Should Investors Look Out For?
India isn’t without its own buffers this time. Monthly SIP inflows running at Rs. 20,000-25,000 crore, alongside steady domestic institutional buying, have given Indian markets a kind of counter-cyclical cushion that wasn’t nearly as strong a decade ago, absorbing a good chunk of whatever foreign funds decide to sell.
The RBI is also sitting on foreign exchange reserves in the $650-700 billion range, giving it real capacity to smooth out rupee volatility if the yen’s moves start spilling into currency markets more broadly.
None of that means a repeat of August 2024 is off the table. If the BoJ does move faster than expected and the yen snaps back the way it did in 2024, the initial reaction in Indian markets would likely look similar: a sharp, fast drop driven by forced selling rather than anything wrong with Indian companies themselves.
The more useful question for investors probably isn’t whether that kind of volatility could happen again, since it plausibly could, but whether it would be a repeat of a short, liquidity-driven shock that faded within weeks last time, or something that runs deeper.
Investors with exposure to companies carrying unhedged yen-denominated debt, or portfolios concentrated in the most liquid large-cap names that tend to get sold first in these episodes, are the ones with the most reason to pay close attention to how the BoJ’s next few meetings play out.
Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on tradebrains.in are their own, and not that of the website or its management. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution while investing or trading in stocks. Trade Brains Technologies Private Limited or the author are not liable for any losses caused as a result of the decision based on this article. Please consult your investment advisor before investing.
