Yen Emerges as a Better Hedge Against AI-Driven Market Shocks

Goldman Sachs says the yen is becoming a more effective hedge against AI-driven market shocks, as Japan’s shifting policy backdrop reduces the risk of sharp yen depreciation during periods of rising global yields.

The yen reaffirmed its traditional haven status amid last week’s global tech selloff. It gained 0.9% against the U.S. dollar on Thursday and touched its highest level in more than a month on Friday. The rally was triggered by worries over the AI investment boom that dragged equities lower and fueled a sharp rally in U.S. Treasury bonds. The yen later gave up part of its gains as U.S. yields stabilized.

According to Goldman Sachs, the AI boom has left both U.S. stocks and the U.S. dollar highly vulnerable to a deterioration in growth outlooks. A scenario where equity prices fall alongside lower bond yields would create one of the most favorable backdrops for the yen historically.

Early signs suggest the yen is less vulnerable to rising global yields. Its recent weakness in response to higher yields has been far more muted compared with the past six to seven years. Strategists argue this likely reflects reduced depreciation pressure stemming from Japan’s domestic policy settings.

This marks a stark contrast to 2022, when the Bank of Japan kept its yield curve control framework in place while global borrowing costs surged. Goldman Sachs notes the shift means “the risk of holding the yen as a hedge should be lower, even with carry still negative.”

Supportive domestic policy conditions, cheap yen valuations and a higher risk of currency intervention also cap upside potential for USD/JPY and improve the asymmetry of holding the yen as a hedge.

In the near term, Goldman Sachs remains bearish on EUR/JPY. It sees few immediate catalysts for a sharp yen appreciation, and deems it unlikely that the Bank of Japan will surprise markets with a hawkish tilt at its October 30 policy meeting.

Over a longer horizon, however, strategists view USD/JPY as a more effective trade to hedge against worsening risk sentiment. “Shorting USD/JPY should be the most efficient strategy to hedge broader growth volatility, especially AI-related shocks,” they wrote.

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