Goldman Sachs says that as Japan’s policy environment has evolved to reduce the risk of a sharp yen decline amid rising global yields, the yen is becoming a more effective hedge against market shocks driven by artificial intelligence.
“Although the broader global economic outlook still suggests further yen weakness, the yen now appears more attractive than in recent years as a hedging tool for cyclical portfolios,” strategists including Kamakshya Trivedi wrote in a report on October 23.
Previously, the yen once again demonstrated its traditional safe-haven attributes during last week’s global tech stock sell-off. On Thursday, the yen rose 0.9% against the dollar, and on Friday reached its highest level in over a month, as concerns over the AI investment boom triggered equity market declines and drove up U.S. Treasury prices. Subsequently, yen gains moderated as U.S. Treasury yields stabilized.
Goldman Sachs argues that the rapid rise of artificial intelligence makes both U.S. equities and the dollar particularly vulnerable to deteriorating growth prospects. A simultaneous drop in equities and bond yields would create historically favorable conditions for the yen.
The firm notes early signs that the yen’s vulnerability to rising global yields is diminishing. Compared to the past six to seven years, the yen’s recent response to yield increases has been relatively muted—a trend strategists believe may reflect reduced downward pressure on the currency stemming from domestic Japanese policy.
This contrasts sharply with 2022, when the Bank of Japan maintained yield curve control despite soaring global borrowing costs. Goldman Sachs says this shift implies that “even with negative carry, holding the yen as a hedge should entail lower risk.”
A more supportive domestic policy environment, low yen valuation, and heightened risks of monetary intervention are also constraining the potential upside for the U.S. dollar against the yen, improving the asymmetry of holding the yen as a hedge.
In the short term, Goldman Sachs remains bullish on selling the euro against the yen, noting there are currently few clear catalysts for a significant yen appreciation, and the Bank of Japan’s hawkish signals in its October 30 policy statement make it difficult for markets to anticipate unexpected moves.
However, in the longer term, strategists believe the dollar-yen trade offers a more effective hedge against worsening risk sentiment. They write: “Shorting USD/JPY should be the most effective strategy for hedging overall economic volatility, especially against AI-related disruptions.”
