Report Industry Investment Rating No relevant content provided. Core Viewpoints - The traditional logic of currency tightening fails to support the yen's exchange rate. Instead, it triggers market panic about "soaring debt costs," and the yen has entered a non - linear fluctuation period dominated by "sovereign risk premium" [11]. - The core contradiction lies in the decoupling of nominal and real returns. The rise in Japanese interest rates is seen as a punitive premium for "rising debt costs" rather than an attraction for asset repatriation [3]. - In the "high - market trading," the stock market and the foreign exchange market have different pricing logics. The stock market prices "nominal prosperity," while the foreign exchange market prices "credit dilution," resulting in a long - term "stock up, exchange down" structure [30][31]. - The yen's weakening is self - reinforcing due to factors such as negative real interest rates, asset offshoreization, and direct foreign investment. Its reversal depends on external liquidity shocks [4][38]. - In 2026, the yen's pricing logic is shifting from "interest rate spread fluctuations" to "credit risk pricing." The exchange rate is expected to be in a high - level platform with increased volatility, and the yen's safe - haven property has basically collapsed [46][52]. Summary by Directory I. Phenomenon and Contradiction: The "Abnormal Picture" after Interest Rate Hikes and the Collapse of Pricing Power - In early 2026, the yen market is experiencing a systemic collapse of pricing power. Despite the Bank of Japan raising the benchmark interest rate to 0.75%, the traditional currency tightening logic fails to support the exchange rate [11]. - The "interest rate up, exchange rate down" phenomenon is due to the market's confirmation of "insufficient real returns" after the interest rate hike. The 160 - level for the yen is a reflection of the shift in the core contradiction from "monetary policy speed" to "structural collapse of the national balance sheet" [11][12]. - Japan has a negative real interest rate and a large budget deficit, which makes the nominal interest rate hike an amplifier of sovereign risk premium [13]. II. Why Do Interest Rate Hikes Suppress the Yen? —— An Explanation of Credit Pricing - The yen has shifted from a "interest - rate - spread currency" to a "credit asset." The increase in nominal interest rates is regarded as a risk signal of "soaring government debt costs," and the exchange rate weakness is a discount on Japan's fiscal sustainability [15]. - The current interest rate increase is a "term premium penalty" rather than a return repair. As long as the real return remains negative, the yen's depreciation pressure cannot be reversed by marginal interest rate hikes [15][18]. - The Bank of Japan is "captured" by fiscal policy, and interest rates have become a policy ceiling. International balance of payments' structural blood loss provides an irreversible physical basis for the yen's credit discount [18]. III. "High - Market Trading": Why Does the Japanese Stock Market Rise While the Yen Weakens? - "High - market trading" is an asset allocation paradigm based on the "fiscal - led" logic. The stock market and the foreign exchange market have different pricing logics, resulting in a stable "stock up, exchange down" structure [30][31]. - Cross - border funds show a pattern of "buying assets and stripping the currency." The yen plays the role of a "depreciation accelerator" in the derivatives market, and the "high - market trading" may switch from a "credit discount model" to an "extreme reversal game" [31][32]. IV. Carry Trade Momentum and Structural Blood Loss: The Self - Reinforcing Mechanism of the Yen's Weakness - The yen's depreciation is driven by a systemic financing subsidy due to negative real interest rates. The difference in nominal interest rates between the US and Japan creates a carry trade floor [36]. - The change in the US Treasury yield curve is reshaping the microstructure of short positions. As long as the long - term US Treasury yield does not collapse, the existing yen short positions will form a sticky configuration [37]. - The overall "offshoring" of the balance sheet, including the institutional asset offshoring driven by NISA for residents and the large - scale direct investment in the US by enterprises, has led to the yen's weakness becoming a long - term sovereign credit discount [38]. V. Outlook, Point Anchors, and Risk Warnings 1. Operation Rhythm Judgment: From Political Premium to Yield Convergence - In the first half of 2026, the exchange rate will be affected by the election and subsequent fiscal legislation. The exchange rate may frequently hit 159, and the US - Japan interest rate spread will remain around 200bp [47]. 2. Strategy Ideas and Core Pricing Range - Future operations should focus on defending key risk ranges rather than simple interest - rate - spread trading [49]. 3. Non - linear Risk Warnings - The 159 - 162 range is a game area for Japan's sovereign credit and bond market stability. The 152 - 159 range is a core allocation area for structural foreign exchange purchase demand. The 150 - 152 range is a liquidity bottom for position games and intervention expectations [50]. - Risks include political uncertainties, sovereign credit downgrades, Fed policy uncertainties, and the risk of crowded trades [50][51]. 4. Conclusion: From "Collapse Pricing" to "Normalized Valuation Reconstruction" - The yen's core pricing logic has been restructured. It is no longer a simple interest - rate - spread currency but a dynamic discount tool for Japan's sovereign balance sheet quality. The yen's safe - haven property has collapsed, and it will be in a state of high volatility and low certainty [52].