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Foreign investors bought about $156 bln of Japanese shares in 2013. Many appeared to have hedged the currency risk. Other investors were drawn to ETFs that also hedged out the currency risk (e.g. DXJ).

Observers have generally recognized that a weaker yen coincided with the rise in Japanese shares. The logic was compelling. A weaker yen promotes exports and boosts the yen value of overseas earnings. Businesses have not shared the windfall profits much with their employees.

These Great Graphics assembled on Bloomberg illustrate shifting relationships. Simply put, the dollar-yen exchange rate is more correlated with the S&P 500 than the Nikkei.

The top chart is the rolling 60-day correlation (on the percentage changes) in the dollar-yen and the Nikkei. The lower chart is of the dollar-yen and the S&P 500.

The correlation of the S&P 500 and dollar-yen stands at about 0.66 the highest since mid-2010. The correlation of the Nikkei and dollar-yen is about 0.35, the lowest since last May. Moreover, not shown here, but the 30-day correlation suggests the trend has accelerated.

Over the past 30-days, the rolling correlation between the Nikkei and dollar-yen has slipped to about 0.31, the lowest since last April. At the same time, the S&P 500 and dollar-yen's correlation has risen to 0.76, the highest since 2008.

The correlation on the percent-change basis is the correlation of returns many investors and portfolio managers are most interested in. However, on a purely directional basis, the yen and Nikkei are still tightly correlated, though it has weakened a bit. The 30-day correlation on levels is 0.76, down from 0.94 in the 60-day period and 0.89 over the past 90 days.

The correlation between the level of dollar-yen and the level of the S&P 500 is also tight. In the past 30-days the correlation is 0.86, just above the dollar-yen and Nikkei over the same period. Over the past 60 days, dollar-yen and S&P correlation stands at 0.91 and over the past 90 days it is at 0.82.

This naturally begs the question of the correlation of the Nikkei and the S&P 500. Over the past 60-days and a percentage change basis, the correlation is just below 0.25. Running the analysis on simply the levels of the two indices, the correlation is about 0.85.

Source: Dollar-Yen Linked More To S&P 500 Than Nikkei