One long-standing axiom of markets, at least during the QE years, is being tested in real time, and it’s making Bank of Japan policymakers (and at this point, politicians too) nervous: the Japanese Yen shall fall when equity markets rally. After weeks of central bank action surprising on the dovish side, market participants have been left scratching their heads as this rule has been seemingly violated through and through.

After all, USD/JPY, which opened the year just above ¥120.00, is now barely holding above ¥111.00; and the S&P 500 is only down -1% this year, and less than 100-points from all-time highs. The Japanese Nikkei 225 is in much worse shape, itself down over -10% this year. There is a fair amount of irony in these numbers: the US Dollar is weakening versus the Japanese Yen while US stocks are outperforming their Japanese peers while the Federal Reserve tightens policy and the BoJ eases further.

There are really two ways to look at the problem for Japanese policymakers. We could look at it through the traditional finance lens, looking at the world how it ought to work, and trying to figure out why it’s off beat; or, we could look at the world through the behavioral finance lens, gathering evidence to develop a greater understanding of the situation.

For traditional finance followers, the BoJ, the Yen, and the Nikkei present quite the confounding problem. After all, shouldn’t the superficial divergence in monetary policies allow the Japanese Yen to remain weak? That’s what it says in the textbooks, at least. Yet this is far from reality. Even after the BoJ’s January 29 surprise easing announcement in which the negative interest rate policy (NIRP) regime was introduced, the Japanese Yen has soared against its peers.

There may be something there when looking at the BoJ’s issues – and Japan’s structural issues – through a behavioral finance perspective. There are a few observations worth noting. First, market participants may have lost faith in the BoJ – right off the bat – as it was clear their latest easing attempts were tantamount to a weak attempt at a competitive devaluation, not at helping the real economy. Second, now that Japanese yields are negative some 30-years out on the curve, longer-term issues may be in play, like demographics. A shrinking, aging Japanese workforce means risk seeking behavior in financial markets should decrease, which in turn increases the need for passive income.