Citi's Summary of JPY Weakness

We think the weakness of the JPY in the first half of this year was due to JPY-sale hedging by overseas investors who invest in Japanese equities with a forex-neutral strategy. The market cap of the Japanese equity market has grown by around ¥400trn over the past year. One-third of this is held by overseas investors, and if we assume that 20% of their holdings are under a forex-neutral strategy then JPY- sale hedging will have increased by some¥24trn during this time. During this period the flow of equity investment into Japan from overseas was more than ¥20trn (Figure 1). If 80% of this was unhedged, then it would have resulted in JPY buying of around ¥16trn. This means the scale of JPY-sale hedging would have been almost ¥10trn greater than JPY buying due to new investment. In all markets, not just the forex market, selling must match buying. The exposure needing to be hedged increased rapidly due to gains by the equity market, so there was likely to be a very strong necessity to sell the JPY among investors adopting a forex-neutral strategy (Figure 2).