The Japanese recently fell to a multi-decade low against the US dollar, sparking global discussions on currency volatility and capital flows.
While the development looks Japan-specific on the surface, experts say the real driver is the broader strength of the , shaped by expectations that the US Federal Reserve may keep interest rates higher for longer.
For Indian investors, the key question is not whether the yen is weak, but how this weakness transmits into India through global liquidity, capital flows, and currency movements. Let’s find out what experts have to say on this.
How yen weakness reach India?
Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth Limited, explains, “The yen falling to a 40-year low may sound like a Japan-specific story, but for Indian investors, the real story is not Japan. A weak yen today is largely a strong dollar story.”
Rajani notes that the transmission mechanism is indirect but important, “The yen at 162 or 163 to the dollar is only the headline. The real transmission happens through the dollar and US interest rates. When the dollar strengthens, the rupee comes under pressure. When the rupee weakens, import costs rise.”
A weak yen is often a signal of tighter global financial conditions, which tend to reduce risk appetite and affect emerging markets like India.
Why do Indian markets care about Japan’s currency?
While India has minimal direct exposure to the yen in most portfolios, global capital flows link Japanese currency movements to .
Vijay Kuppa, CEO of InCred Money, points out that “broadly, a weak Japanese yen is good for India”.
He explains, “For decades, global investors have borrowed money in Japan at ultra-low rates to invest in emerging economies like India. This is how the carry trade works. Because foreign investors flood markets with borrowed yen, Indian stock markets and NAVs tend to rise.”
“However, this trade can unwind when Japan continues to raise interest rates or the yen gains value. This can cause foreign money to exit and indices to correct, causing volatility in Indian markets,” Kuppa mentioned.
Adding to this, Abhishek Bisen, Fund Manager, Kotak Mutual Fund, notes that “the unwinding of the yen carry trade, driven by higher BOJ rates and rising JGB yields, has triggered global risk-off flows. This has weakened the rupee, further eroding FPI returns, and translated to potential short-term underperformance for Indian investors”.
How yen carry trade trigger volatility?
The yen carry trade is one of the most important but least visible global financial linkages affecting India.
Rajani explained that, “For years, investors borrowed cheaply in yen and invested that money across higher-return markets, including the US and emerging markets. As long as the yen weakens gradually, markets can absorb it.
The risk comes when the yen suddenly reverses. In that situation, investors may be forced to unwind carry trades quickly. They sell global assets to buy back yen, and that can create volatility across markets, including India.”
Do Indian investors face a direct impact from this?
Experts agree that the impact of yen movement on Indian investors is largely indirect but still meaningful.
Bisen explains, “The impact is largely indirect, driven by the weakening yen against the US dollar, which is itself shaped by expectations around Fed rate policy.”
He adds that global policy divergence is key. “As the Fed remains relatively hawkish while Japan begins to tighten, the yen loses ground, triggering carry-trade unwinds. These reversals drive volatility in emerging market currencies like the rupee and create risk-off flows that ripple through global equity and debt markets, affecting Indian mutual fund returns,” Bisen noted.
Which sectors in India are most likely to be affected?
Rajani highlights the uneven impact across sectors. “IT and pharma companies may benefit from a strong dollar because they earn a large part of their revenue in dollars. A weaker rupee can support margins.”
However, she adds that not all sectors gain. “Import-heavy businesses, oil-sensitive sectors, and companies dependent on dollar-denominated inputs may face pressure.”
Kuppa also notes a Japan-specific angle, “For Indian investors in Japan-focused equity funds, returns are calculated in rupees. So when the yen falls, rupee-adjusted returns can get diluted.”
What should Indian investors do?
Despite the noise around global currency movements, experts emphasise discipline over reaction.
Rajani emphasised, “Do not stop your SIP because the yen has weakened. Currency cycles can create short-term volatility, but they should not disturb a 10-year wealth creation plan.”
Bisen echoes this view, urging investors to stay focused on long-term goals. “Retail investors should avoid overreacting to short-term global currency moves. Maintaining a long-term investment horizon and diversification helps ride out such global volatility,” he concluded.