What the link between the yen and U.S. stocks means for your portfolio
Markets may shrug off any Bank of Japan intervention to strengthen the yen - unlike in July 2024.
Most investors aren't concerned about exchange rate changes between Japan and the U.S. - but there is good reason to pay attention.
The Japanese yen (USDJPY) is slipping against the U.S. dollar DXY, and investors are wondering whether Japanese government officials will intervene in foreign-exchange (FX) markets to prevent the yen from weakening further.
A weaker yen has many negative implications for Japan's economy, as a weaker currency can lead to inflationary pressure. Ideally, the government would want the currency to remain at least stable; instead, the yen has declined materially against the dollar, rising to roughly 162 currently from 100 in December 2020.
While most investors aren't concerned about exchange-rate changes between Japan and the U.S., there is good reason to pay attention, as the AI trade and the weakening Japanese yen appear closely tied through what's called the carry trade.
This is when investors borrow yen to acquire dollars, then use those dollars to invest in U.S. assets. If this trade is left unhedged, an investor who has sold yen can benefit from both dollar appreciation and gains on the underlying investments, such as U.S. tech stocks.
History rhymes
In 2024, something similar happened, causing tremendous damage to the U.S. stock market. The yen weakened to roughly 162 by the middle of July. The Japanese government stepped in, selling dollars to buy yen, a shift that was further impacted by a weak U.S. CPI report.
Not long after, the Bank of Japan surprised markets by hiking rates and delivering a hawkish press conference. A few days later, a weak U.S. jobs report further strengthened the yen. Over a two-week period, the yen strengthened to about 144 to the dollar from 162 - a huge move in FX terms. The reverberations were felt across the market, with the Nasdaq-100 NDX shedding almost 15% over the same stretch.
Japanese yen vs. U.S. dollar exchange rate
The U.S. stock market was vulnerable to such a decline because it had become stretched, with narrow leadership. Volatility measures like the VIX VIX - the market's "fear gauge" - were extremely low. Other measures, such as implied correlations, which indicate whether stock implied volatility moves with the index, were also very low, suggesting that the broad market was not moving in the same direction as the S&P 500.
Fast-forward to now. The yen/dollar rate is around 162, with the three-month implied correlation index lower than where it stood two years ago. Markets today are just as complacent as they were in July 2024.
Even more ominously, the low in implied correlation in 2024 occurred on July 3, the same day USD/JPY peaked. This time, the three-month implied correlation index reached a low on July 10, while the USD/JPY exchange rate peaked on July 8.
It isn't just that the values nearly match or that the events occurred at almost the same time, but also the seasonality. They are literally happening within days of each other, two years apart.
History repeats?
Just because the cautionary signals are the same as 2024 doesn't mean the outcome will be.
Yet intervention risk may not cause a selloff this time. Just because the cautionary signals are the same as 2024, it doesn't mean the outcome will be. It would take more than Japanese government intervention to create the market turmoil seen then. At that time, a series of coincident events contributed to that move. Today, those events, at least for now, do not seem aligned.
For instance, there would need to be a larger, more fundamental shift for the yen to begin strengthening in a way that fully unwinds the carry trade. A surprise rate hike by the Bank of Japan could certainly do a lot of damage; talk of cutting back on fiscal spending in Japan could as well. Otherwise, the market needs a sudden shift in U.S. economic prospects, one that would put pressure on the U.S. Federal Reserve to cut rates and avert hikes.
Of course, something else could trigger a market selloff, completely and entirely separate from the yen-dollar relationship. When stock-market leadership is as narrow and stretched as it is now, a negative earnings season or data that signals interest-rate hikes could make risk assets more vulnerable.
While the risk is real, any Japanese government intervention in yen is likely to be little more than a temporary pause in the currency's weakening trend. The key difference is that intervention in the yen is typically a one-time event and does not have a lasting impact. So if the U.S. market should tumble, it probably won't be because of the yen carry trade.
But if Japan were to make substantive changes to how its pension funds invest and repatriate their overseas holdings, the effects would be much more significant and long-lasting.
Michael Kramer is the founder of Mott Capital Management and a long-only investor focused on macro themes. He analyzes long-term macro trends and short-term market risk using technical analysis, fundamentals and options-market positioning.
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July 18, 2026 11:14 ET (15:14 GMT)
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