Lately, I’ve been watching the Japanese stock market, especially the Nikkei 225 Index. It’s been climbing overall since March.

I’ve drilled down to some of Japan’s biggest stocks such as Toyota (TM), Honda (HMC), and Sony (SNE). These stocks have all had strong recoveries since March, too.

However, I’ve also noticed that there’s a huge inverse correlation to how Japan’s stocks perform and how its currency does.

This happens because many of Japan’s biggest corporations are exporters that rely on a cheap yen in order for their goods to be attractive values to the rest of the world, particularly to the United States and Europe.

This is why the USD/JPY and EUR/JPY exchange rates are very important.

As Japan’s stocks recover, it’s usually because the yen is going down and is expected to fall even further. Therefore, over time, it starts to push up the exchange rates of these pairs due to the falling yen.

So it makes sense that the USD/JPY and EUR/JPY go up over time as Japan’s stocks improve, and there’s a constant inverse correlation between Japanese stocks and their currency, the yen.

If you ever have trouble telling which direction Japan’s currency is going but you have a strong opinion on what their stocks are going to do, then you actually have your direction on the yen.

If you’re a stock trader, you now have greater insight into the yen. And if you’re a currency trader, you may have greater insights into Japan’s stocks now.

If you feel that the yen will continue to sink and that Japan’s stocks will continue to go up, then you’d be interested in buying the USD/JPY and EUR/JPY pairs on pull backs.

These correlations don’t always happen tick-by-tick or day-by-day, but over weeks and months you will see this truth holds.

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