(Bloomberg) -- The slump in the yen has gone so far that it’s no longer giving a boost to Japanese stocks. 

The 30-day correlation between the Nikkei 225 Stock Average and Japanese currency has been negative for most of the past two weeks, as investors became wary about the harm the yen’s relentless slide may do to the economy by increasing import costs and hurting consumers’ purchasing power. 

On top of that, fund managers are fretting about whether Japanese authorities will intervene in the market to arrest the yen’s decline, which has the potential to trigger volatility that can weigh on exporters.  

Read: Global Investors Turn Cautious on Once Favorite Japanese Stocks

While the weak currency had been a boon to companies selling goods overseas and a driving force behind Japanese stocks hitting records earlier this year, for a dollar-based buyer returns are low. That’s led to net selling of shares by foreign investors over the past five weeks, the longest streak since March 2023.

In US currency terms, the Nikkei 225 Stock Average’s gains this year are around 4%, far short of the S&P 500’s 15% increase.

“Investors are increasingly worried about how the weak yen is hurting their dollar and euro returns, and this is leading to more outflows,” said Amir Anvarzadeh, a strategist at Asymmetric Advisors. Currency intervention is no longer effective, “unless its backed up by a big policy pivot by Japan,” he said.

The Bank of Japan earlier this month surprised markets by putting off until July a plan to reduce bond buying. While it kept the door open for a rate hike next month, overnight-indexed swaps aren’t even fully pricing in a 10-basis-point increase, highlighting the huge gap between BOJ and Federal Reserve rates. 

“As long as the BOJ moves at a snail’s pace and ignores the wealth destruction it will continue,” Singapore-based Anvarzadeh said. “While the Fed’s rate cut could help the yen, this current trend could spark a currency contagion in the region.”

Deteriorating Sentiment

Appetite for Japanese stocks has also decreased, with Schroders Plc the latest to downgrade its view on Japanese equities. The weak currency is translating to signs of deteriorating sentiment for consumers and smaller companies, its latest investment note said Wednesday. 

That said, in yen terms the Nikkei has gained more than 17% this year, outperforming major Asian peers. JPMorgan strategists including Rie Nishihara expect the index to head toward 42,000 by year-end due in part to rising wages and corporate reforms. That would be almost 3% above its all-time reached in March. 

However, for Makoto Noji, chief foreign-exchange and foreign bond strategist at SMBC Nikko Securities Inc., the frail currency is an issue. “In light of the rising cost of living due to imported inflation, the weakening yen can no longer be ignored,” he wrote in a research note Thursday. 

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