JPM Japan Equity Strategy

J P M O R G A N Global Markets Strategy 08 September 2026

Japan Equity Strategy Impact of unwinding of yen carry trade on Japanese equities

Since the start of September, the yen has rapidly strengthened from the ¥160/$ level Equity Strategy to the ¥153/$ level, correcting the yen's depreciation. In the market, yen carry Rie Nishihara AC trades appear to be unwinding (Figure 2) on speculation that rate hikes will a S p d n u Y D U /litsecJ P v o g

( accelerate ahead of the BOJ's September Monetary Policy Meeting (MPM) (Figure 1) and the GPIF will shift its asset allocation, raising concerns about the negative E ift()sIrcegoaJxn k p S P B O H R JPMorgan Securities Japan Co., Ltd.

impact on Japanese equities. On September 8, TOPIX was up in the morning Yong Guo, CFA session as the USD/JPY rate declined from ¥154.4/$ in the morning to just under ( ¥153/$, but then TOPIX turned down and fell further on negative news about the JPMorgan Securities Japan Co., Ltd. Middle East situation, with both TOPIX and the Nikkei 225 dropping further Mansi Das toward the close. Our forex team (see September 4 report) thinks that expectations ( for the BOJ to hike rates and for the GPIF to shift its asset allocation are both on the excessive side, and that the market will settle down going forward. In our equity J.P. Morgan India Private Limited strategy outlook, we also assume that the yen will settle in a range of ¥155-160/$ rather than continue to strengthen towards ¥150/$. From this perspective, we have the impression that the stock price decline on the 8th was excessive.

Why we do not expect one-sided yen appreciation

The first reason is that the BOJ is unlikely to accelerate rate hikes while the yen appreciates. With the BOJ's various indicators for underlying inflation heading toward 2%, the BOJ has expressed concerns about the increasing pass-through of forex to inflation, and this has fueled market expectations for faster rate hikes. In other words, if the yen appreciates rapidly, we can envision a reactive loop of expectations for faster rate hikes -> yen appreciation -> excessive yen appreciation -> more controlled expectations for faster rate hikes. Second, we have noted on several occasions (in January and July 2026) the possibility of a shift in GPIF's asset allocation (market speculation of this increased after the GPIF’s Board of Governors discussed a basic portfolio review at its August 21 meeting). However, if GPIF revises the basic portfolio allocation, we think this is more likely to happen around the end of the fiscal year (March 2027), and given that this is still six months away, we think uncertainty is high and that there is little likelihood of a large impact on the exchange rate in the near term. In any case, because both the BOJ and the GPIF are able to exercise control, we think it is unlikely that the yen will appreciate excessively to a level below ¥150/$.

In addition, various structural factors have made excessive yen appreciation less likely, including the high ratio of overseas production at Japanese companies (Figure 3), the decline in the repatriation rate of corporate profits earned overseas M O R P n u itfsercvaogd

(Figure 4), the expansion of the digital deficit (Figure 5), the increase in energy O m itfsIercvaoJn p D C n D T d p g a 'iltfsrecJ

imports, and the impact of capital flows, such as household investment in foreign assets (Figure 6). We estimate that each ¥1 depreciation against the dollar has a tIsrcea m A N P n h u S o

positive impact of around 0.5ppt on corporate earnings (TOPIX operating profit), which is lower than the forex sensitivity in 2016, 10 years ago, when a ¥1 depreciation had a positive impact of 1.0ppt (Figure 7). m Y D U X O C T P S g p o y v itfI’rsJean

See page 6 for analyst certification and important disclosures.

Rie Nishihara AC Global Markets Strategy ( September 2026 JPMORGAN

Desirable level for Japanese equities: ¥150/$ is not a threat

At present, we think a range of ¥155-160/$ would be desirable for Japanese equities. Considering the FY2025 average of ¥150/$ and corporate assumptions in earnings guidance averaging ¥153/$ for FY2026 (Figure 9), we think this range would have a modest…