The appreciation of the yen has become an "invisible killer" for the Japanese stock market: export enterprises' profits exceed expectations but stock prices remain sluggish, and the benefits from foreign exchange are receding.

Japan may take more measures to support the yen, increasing the risk and dimming the profit outlook for companies, as investors weigh the impact of any appreciation in the yen exchange rate on exporters' profits. Over the past two years, a weak yen has been a key driver of Japanese exporters exceeding profit expectations, particularly since many companies had previously set more optimistic foreign exchange forecasts. For example, Honda Motor Co., Ltd. Sponsored ADR (TM.US) reported last week that foreign exchange contributed 91 billion yen to its operating profit in the first quarter, exceeding market expectations. Frank Benzimra, head of Asian equity strategy at France's Industrial Bank, stated, "Current market sentiment is cautious. The yen is undoubtedly a risk factor that the stock market needs to pay attention to." Benzimra indicated that as the effects of the recent joint intervention in the market by Japan and the U.S. wane, stock investors are concerned that the Bank of Japan may accelerate interest rate hikes. He added that any further fluctuations in the exchange rate will put pressure on the stock market, especially on automobile manufacturers' stocks. Most earnings this quarter have exceeded analysts expectations, but not all results have translated into stock price increases, with some companies even seeing their stock prices drop after earnings reports. Data shows that in the April to June quarter last year, companies that exceeded profit expectations saw their stock prices average 1% higher than the MSCI Japan Index the day after their earnings announcements. This year, companies that exceeded expectations saw their stock performance 0.5% lower than that index. As the yen's trajectory becomes increasingly unpredictable, investors are growing skeptical of companies that rely on a weak exchange rate to boost profits. Several well-known exporters with strong performance this quarter, such as camera manufacturer Canon Inc. and pharmaceutical company Takeda Pharmaceutical Company Limited, subsequently experienced declines in their stock prices. Industry research strategists Laurent Douillet and Aditya Khanduja wrote in a report, "Market reactions are cautious; the factors driving earnings above expectations are exchange rate fluctuations, not operational improvements." They warned that given authorities have shown an "official determination" to stabilize the yen, future earnings upgrades will require stronger operational performance to support, rather than favorable currency trends. Chris Smith, portfolio manager at Polar Capital, stated that investors' increasingly discerning eye reflects more of a strategic shift rather than a broader headwind faced by the Japanese market. He noted that with increasing uncertainties regarding factors such as the yen, the GEO Group Inc. politics, and capital expenditure cycles in artificial intelligence, more traders are turning to bottom-up investment strategies rather than purchasing a basket of exporter stocks. He predicted that manufacturers with strong demand channels, such as chip equipment manufacturers, should remain resilient even amid a strengthening yen. Benzimra remarked that any significant appreciation of the yen, such as that which may occur in the summer of 2024, will exert widespread downward pressure on the Japanese stock market. He stated, "Before the September policy meeting, there will be increasing questions about whether the Bank of Japan should tighten monetary policy. If we see yen volatility suddenly rise again, it will weigh on the market."