The picture is more puzzling in Japan.
Despite record foreign buying of Japanese stocks this year, the yen has continued to languish near multi-decade lows, defying the conventional expectation that capital inflows should support a country's currency.
The apparent contradiction reflects a growing separation between equity investment and foreign-exchange positioning. Global investors can buy Japanese shares while simultaneously limiting or eliminating their exposure to the yen through futures, currency-hedged exchange-traded funds, forwards and swaps.
According to Tokyo Stock Exchange data, overseas investors bought a net 10.94 trillion yen worth of Japanese cash equities in the first half of this year.
That surpassed the 8.3 trillion yen of net purchases recorded during the first half of 2013, at the beginning of the Abenomics era.
The inflows have been driven by the artificial intelligence investment boom and growing expectations that Japanese companies will continue improving corporate governance and capital efficiency.
Global investors increasingly view Japan's semiconductor equipment, materials, components and data center-related companies as key beneficiaries of the AI supply chain.
The shift has already reshaped Japan's corporate landscape. SoftBank Group has overtaken Toyota Motor in market capitalization on expectations for AI infrastructure growth, while Kioxia has also moved ahead of the automaker as investors bet on surging memory demand from AI data centers.
Foreign buying has expanded well beyond semiconductor equipment makers such as Tokyo Electron to include electronic materials, optical fiber, power infrastructure and other AI-related businesses.
Improving shareholder returns and stronger pressure on Japanese companies to enhance capital efficiency have further reinforced foreign demand.
Yet buying Japanese stocks does not necessarily translate into buying the yen.
Although cash equities on the Tokyo Stock Exchange are traded in yen, international investors can maintain exposure to Japanese stocks while largely avoiding currency risk.
CME lists both yen- and dollar-denominated Nikkei 225 futures, while currency-hedged ETFs, forwards and swaps allow investors to capture Japanese equity returns without fully bearing the risk of further yen depreciation.
That helps explain why record foreign purchases of Japanese shares have coincided with continued weakness in the yen.
The incentive to hedge remains strong. As of July 2, the dollar traded around the 162-yen level, leaving many overseas investors reluctant to assume additional yen exposure while increasing allocations to Japanese stocks.
Asset managers note that foreign investment in Japanese equities inherently creates currency risk. Selling yen through forward contracts or swaps allows them to neutralize that exposure while retaining their equity positions.
The challenge is that public data offer little visibility into the scale of those hedging activities.
Japan's Ministry of Finance securities investment statistics and Tokyo Stock Exchange investor trading data reveal how much foreigners buy or sell Japanese shares, but not whether they subsequently hedge their currency exposure.
That makes the current market dynamic better understood as investors buying Japanese companies while keeping much of their currency exposure in dollars rather than yen.
The currency's weakness also reflects structural macroeconomic factors, including the wide interest-rate differential between the United States and Japan and lingering skepticism over how quickly the Bank of Japan can normalize monetary policy.
In other words, investors can be bullish on Japan's corporate earnings without necessarily being bullish on its currency.
The divergence also has implications for South Korea.
Foreign selling of Korean equities tends to generate immediate won-selling and dollar-buying pressure. By contrast, foreign purchases of Japanese stocks accompanied by currency hedges generate far less demand for the yen.
In effect, global investors are rotating part of their exposure from Korea's semiconductor rally into Japan's AI supply chain while continuing to keep their currency preference tilted toward the U.S. dollar.
Copyright ⓒ Aju Press All rights reserved.