The Nikkei closed at 66,016 yen last week and is up 31.14% this year, one of the best runs on the planet. Now, fund managers are lining up to tell investors how right they were to hold Japanese equities.
Every time, I ask the same question back. Up 31% in what currency, and against whose exchange rate? Almost nobody has a good answer, because almost nobody checked. The chart looks too good to interrogate, and that’s exactly why investors should be questioning it.
An index tracks the price of shares in yen. It has no opinion on what a foreign investor really gets to keep once that yen converts back into dollars or pounds. Ordinarily, the distinction barely matters; the currency moves a little either way and washes out over a year.
This year it has not washed out – the yen has had one of its worst runs in decades sitting directly underneath one of Japan’s best. It fell to a 40-year low even after the Bank of Japan raised its policy rate to 1%, the highest since 1995.
Higher rates are supposed to help a currency hold its ground. Instead, the yen kept sliding because 1% is still a joke next to yields of 4.7% on offer elsewhere. A token hike did not fool traders.
By early August, the slide had gone far enough that Tokyo and Washington stepped in together to prop the currency up, a move neither side makes lightly. The yen jumped more than 1% in a single session on the news. The move was effectively two governments admitting they had run out of quieter options.
Since then, the yen has settled back near 159 to the dollar, roughly where it began the year, but only because of that rescue. Take the intervention out of the picture, and plenty of foreign investors holding Japanese equities would have spent large stretches of 2026 watching currency losses quietly cancel out gains that, in yen, looked spectacular on paper.
A 31% return printed in yen and a 31% return sitting in your own account are not the same thing, and treating them as interchangeable is how a great year on paper turns into an unremarkable one in reality.
This mismatch reaches far beyond Japan. Every investor buying into Asia right now needs to ask what the local currency is doing underneath the returns they are chasing.
Strong companies, buybacks, governance reform- none of it protects investors if the currency slides while they hold the position. Japan has just made that point louder than any market this year.
The pressure hasn’t eased either. Japan’s interest rate still sits at 1%, against yields near 4.7% elsewhere. Until that yawning gap narrows, capital has every reason to keep drifting away from yen. And one future rate move will not fix that on its own.
The Bank of Japan meets again on September 17-18, with inflation already running above its 2% target, so another hike is on the table. But, again, a single meeting will not close a gap this size.
Currency-hedged Japan funds stripped out the yen entirely this year and captured close to the full 31%. Unhedged funds carried every bit of that currency swing, including the stretch when the yen sat at a 40-year low before Tokyo and Washington bailed it out.
Two investors can own the exact same Japanese companies this year and finish with meaningfully different numbers, purely because of a box ticked on a factsheet neither of them read closely.
It’s the difference between an undeniably excellent year and a mediocre one. Yet many investors couldn’t tell you today which side of that line their own portfolio sits on.
Wealth managers across the region should be walking their investors through that distinction right now, before the next currency shock, not after it. An unhedged Japan position is a play on the yen whether the investor meant to take one or not.
That’s a very different bet from simply punting on Japanese companies.
Nigel Green is founder and CEO of the deVere Group.
