Bank of America analysts contend that foreign exchange hedging tied to equity exposure has overtaken traditional macro fundamentals as a key driver of major currency movements, with particular implications for the Japanese yen. The bank's analysis points to hedging by overseas investors as a growing source of yen selling amid a pronounced rally in Japan's equity market.
Since the second quarter of 2025, the Nikkei 225 has outperformed other principal equity indices, and that outperformance has coincided with increased hedging activity by international investors. The report estimates those hedging flows may have exerted downward pressure on the yen amounting to as much as 10% - a sizeable effect that helps explain why the currency has stayed weak even in the face of data and interest-rate expectations that might otherwise support it.
Bank of America contrasts Japan's experience with that of several other countries, where hedging flows appear to have acted as a tailwind for local currencies. The report highlights the Swedish krona, Swiss franc, Canadian dollar and Australian dollar as examples of currencies that have seen hedging-related support, reflecting their respective equity market behavior and international investment positions.
For the U.S. dollar, the bank suggests hedging linked to robust U.S. equity gains may have produced modest selling pressure, rather than a strong bid. Overall, the analysis underscores how equity performance and the desire of global investors to manage currency exposure are increasingly interwoven, transmitting equity moves into foreign exchange markets through hedging operations.
Looking forward, the bank argues that the balance of risks now favors a stronger yen. Two developments could prompt a reversal of the recent yen weakness: a slowdown in the AI-driven equity rally and potential foreign exchange intervention by Japanese authorities. If equity-driven hedging flows begin to unwind, the bank says certain cross rates - specifically CHF/JPY and CAD/JPY - could come under downward pressure for those pairs, implying yen appreciation against the Swiss franc and Canadian dollar.
The analysis also notes its primary caveat: continued strength in AI-related equities remains the principal risk to a scenario of yen appreciation. If those stocks keep rising, hedging flows could persist or intensify and maintain pressure on the yen.
Methodological note: The report frames hedging flows as a material channel through which equity returns have been transmitted into currency markets, and quantifies the potential impact on the yen while describing directional effects for other G10 currencies. It does not introduce additional macroeconomic or policy claims beyond the hedging-flow dynamics and the upside risk to the yen from intervention or an equity slowdown.