The yen¡¯s weakness is turning foreign investors away from Japanese stocks.

The Nikkei 225 Stock Average has jumped 14% this year, outperforming its global peers. But for dollar-based investors, the gains shrink to just above 3% after the yen¡¯s tumble to a 34-year low against the greenback. That¡¯s far below the S&P 500¡¯s increase of 9.5% and the Hang Seng Index¡¯ dollar-based returns of 11%.

¡°Investing in Japanese equities becomes harder if the currency continues to weaken,¡± Yue Bamba, head of Japan active investments at BlackRock, said in an interview in Tokyo. ¡°When you speak with global investors about Japan, FX is definitely top on the mind for everyone.¡±

The yen¡¯s slide has boosted profits for exporters, which has traditionally been a driver for Japanese stocks. Still, the Nikkei 225 has declined more than 6% amid concerns the currency is becoming a liability for domestic consumer spending and companies¡¯ import costs.

The yen¡¯s future performance depends more on the actions of the U.S. Federal Reserve than the Bank of Japan, according to Bamba. The yen may gradually weaken to the 170 range against the dollar if the Fed doesn¡¯t cut rates. Alternatively, a level of 130 to 135 is ¡°entirely conceivable¡± if there are rate cuts.

The yen traded in the 155 range to the dollar on Monday in Tokyo, a level that Bamba considers ¡°undervalued.¡± The yen¡¯s fair value is ¡°much higher¡± than the current levels, ¡°easily in the 130s,¡± he said. If the yen strengthens past 150, overseas investors will feel comfortable coming back to the market, he said.

The Japanese government has likely intervened at least twice in the market in the past weeks to shore up the yen¡¯s decline. Authorities in Tokyo may continue their attempts to support the currency as the yen¡¯s extended weakness ¡°is becoming a bit of a political headache¡± as it is not good for the country or for living expenses, Bamba said.

Bamba expects the BOJ to potentially hike in July or October, and the central bank to reduce JGB purchases before that. Gov. Kazuo Ueda¡¯s tone on the currency has clearly shifted recently, which at the margin can bring forward the timing for steps toward normalization, according to Bamba.

The BOJ offered to purchase a smaller amount of government bonds in a regular operation on Monday than it did on April 24 as it seeks to reduce its presence in the country¡¯s debt market.

Other investors also see the BOJ boosting the yen with higher rate. The Vanguard Group expects the Japanese benchmark rate to rise to 0.75% by year-end, compared to a range of 0% to 0.1% now. Pacific Investment Management sees three quarter-point hikes as...