Goldman Sachs says the Japanese yen is becoming a more effective tool for hedging against artificial intelligence-driven market shocks, because changes in Japan's policy environment have reduced the risk of sharp yen weakness when global yields rise.
Strategists including Kamakshya Trivedi wrote in an October 23 report: "Although the global backdrop still supports further yen weakness, the yen now looks like a more attractive hedge within pro-cyclical portfolios than it has in recent years."
That judgment came after the yen once again displayed its traditional safe-haven characteristics during last week's global technology stock selloff. On Thursday, the yen rose 0.9% against the dollar and on Friday briefly touched its strongest level in more than a month, as concerns over the AI investment boom dragged stocks lower and triggered a sharp rally in U.S. Treasuries. The yen subsequently gave back some of its gains as Treasury yields stabilized.
Goldman Sachs believes the AI boom has made U.S. equities and the dollar particularly sensitive to deteriorating growth prospects. If a shock simultaneously pushes down stocks and bond yields, it would create the kind of market environment that has historically been most favorable for the yen.
Goldman Sachs also said there are preliminary signs that the yen's vulnerability when global yields rise is diminishing. Recently, the yen's weakening response to rising yields has been more limited than over the past six to seven years. Strategists believe this likely reflects reduced depreciation pressure stemming from Japan's domestic policy environment.
This stands in sharp contrast to 2022, when the Bank of Japan maintained yield curve control (YCC) even as global borrowing costs soared. The change in this relationship means that even if carry trades remain negative-yielding, the yen "should be a less painful hedge to hold."
A more constructive domestic policy environment, an undervalued yen, and rising risks of currency intervention are also jointly limiting the potential upside for the dollar against the yen, thereby improving the asymmetry of holding the yen as a hedging tool.
In the near term, Goldman Sachs continues to favor shorting the euro against the yen, citing few obvious domestic catalysts to drive a sharp yen appreciation and a high bar for the Bank of Japan to surprise the market with a hawkish message at its October 30 policy decision. Over a longer horizon, however, these strategists see dollar-yen trading as a more effective protection against deteriorating risk sentiment. They wrote: "Shorting USD/JPY should be the most effective tool for hedging overall growth volatility, especially a broad AI shock."
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