When investing in the Japanese stock market, besides the rise and fall of stock prices, do I also need to worry about the risk of yen exchange rate fluctuations?

Good question! Many beginners in overseas investing overlook this point. Let's break it down in plain language.

The answer: Absolutely! This might be one of the biggest "hidden" risks in your Japanese stock investments.

You've hit the nail on the head. Focusing solely on stock price movements reflects a local Japanese investor's perspective using yen. But as Chinese investors, we ultimately need to convert profits back to RMB, introducing an extra hurdle: exchange rates.

Your final return essentially combines two factors:

The stock's price movement
The exchange rate fluctuation between JPY and RMB

Think of them as two ends of a seesaw. Play it right for double gains; get it wrong, and you might end up with nothing.

Why is exchange rate a big deal? Let's illustrate:

Suppose you invest 50,000 RMB in Japanese stocks.

Step 1: Currency Exchange
- Exchange rate: 1 RMB = 20 JPY
- You get: 50,000 * 20 = 1,000,000 JPY
Step 2: Buying Stocks
- You buy Japanese stocks with 1,000,000 JPY.

Now, consider scenarios after one year:

Scenario 1: Double Win (Stock up, JPY appreciates)

Stocks perform well: 1,000,000 JPY → 1,200,000 JPY (+20%).
JPY strengthens: New rate 1 RMB = 18 JPY (JPY more valuable).
Convert back: 1,200,000 / 18 ≈ 66,667 RMB.
Result: 50,000 RMB → 66,667 RMB. Total return: 33.4%! (Better than the 20% stock gain).

Scenario 2: Wasted Effort (Stock up, JPY depreciates)

Stocks rise to 1,200,000 JPY (+20%).
JPY weakens: New rate 1 RMB = 24 JPY.
Convert back: 1,200,000 / 24 = 50,000 RMB.
Result: Despite 20% stock gains, you break even in RMB terms. All effort for nothing!

Scenario 3: Double Whammy (Stock down, JPY depreciates)

Stocks fall to 900,000 JPY (-10%).
JPY weakens: New rate 1 RMB = 24 JPY.
Convert back: 900,000 / 24 = 37,500 RMB.
Result: Total loss: 25% (Worse than the 10% stock loss).

Real-World Example: Japanese Market 2023-2024

This period perfectly mirrors Scenario 2.

Nikkei Index: Soared to record highs. Funds showed impressive returns (e.g., +30-40%).
JPY Exchange Rate: Plunged against USD/RMB, hitting multi-decade lows.

Result? A significant portion of stock gains was "eaten" by the falling yen. Returns looked great on charts but shrank dramatically when converted to RMB.

What Can You Do?

Two main strategies to manage this risk:

"Ride It Out" - Accept Exchange Rate Volatility
- For whom? Long-term investors (5-10+ years), or those bullish on both Japanese companies and a future JPY rebound.
- Logic: Ignore short-term FX swings. Bet on Japan's economic fundamentals or eventual monetary policy shifts (e.g., end of ultra-low rates). You're doubling down: betting on Japanese firms and the yen.
"Hedge" - Eliminate Exchange Rate Risk
- What is it? Pay a small cost for "insurance" to neutralize FX risk. Your returns then primarily reflect stock performance.
- How? For most investors, the simplest way is buying currency-hedged ETFs or funds.
- These often include "Hedged" in their names. Fund managers use tools (e.g., forward contracts) to hedge FX exposure.
- Pros: No FX worries; focus purely on stocks. Outperforms unhedged funds during JPY depreciation.
- Cons:
  - Hedging costs slightly reduce returns.
  - You miss out on potential gains if JPY appreciates significantly (the "insurance" removes both risk and upside).

Key Takeaways

Should you worry? Yes! Absolutely! Exchange rate risk is critical for Japanese stocks (and any overseas assets).
Your returns are a "duet": Determined by both stock performance and JPY exchange rates.
Recent history is the best textbook: Soaring Nikkei + plunging yen demonstrated FX risk vividly.
You have choices:
- "Ride It Out" – Bet on stocks and yen appreciation.
- "Hedge" – Buy hedged products to isolate stock returns.

Before investing, decide: Are you betting on Japanese companies, or on Japanese companies plus the yen? These are fundamentally different decisions.