Why The Japanese Yen Could Rise Even As Its Shares Fall

USD/JPY Forecast: Near 158 as Goldman Desk Examines AI Investment Risks

Currency analysts at Goldman see scope for Yen gains if AI financing strains deepen, while Japanese portfolio flows offer an early test of the argument.

The US Dollar-to-Japanese Yen exchange rate traded near 158.02 on Friday evening, down 0.08% on the day but still around 1.3% higher over the past month.

That modest Yen recovery leaves much of the Dollar’s recent advance intact, even as Goldman Sachs’ Asia macro desk identifies a vulnerability in the investment boom supporting American assets.

Nimita Bhargava, a Goldman managing director in FICC and Equities, writes: “The cost of financing the AI buildout is starting to collide with how much the market can comfortably absorb.”

Her argument concerns what happens if financing pressure spreads through technology investments, prompting investors to reduce exposures and buy back currencies used to fund them.

The Yen could benefit even if Japanese shares fall alongside American technology stocks.

When falling yields signal trouble for the investment boom

In her Thursday note, Bhargava identifies a simultaneous deterioration in credit, shares and the growth outlook reflected in bonds.

Borrowing spreads were widening across AI-related companies, while both the Nasdaq and South Korea’s KOSPI were selling off, connecting pressure on the American companies buying computing capacity with their Asian suppliers.

She writes:

“Given the scale of leverage now embedded in the AI capex ecosystem, we may be approaching a level of yields (R**) where that ecosystem becomes materially more rate-sensitive than it was even six months ago.”

R** denotes that critical yield level.

The distinction is between rates rising because inflation remains persistent and yields subsequently falling because investors fear borrowing costs will damage growth or credit.

In the latter scenario, the Dollar can lose support from both US yields and demand for American investments.

Bhargava records how currencies were responding after the US inflation release:

“The FX moves post CPI are also telling. The currencies most exposed to AI — USD KRW TWD are all weaker whilst funding currencies EUR CHF JPY all stronger.”

That groups the Dollar with the Korean Won and Taiwan Dollar through their exposure to AI financing and supply chains, rather than their usual behaviour during a market sell-off.

For investors who borrowed Yen to acquire other assets, closing those positions can require buying the currency to repay the borrowing.

Why losses on Japanese shares can generate Yen buying

Crédit Agricole’s David Forrester identifies another source of demand, arising from foreign investors’ Japanese shareholdings rather than Yen-funded borrowing.

“The JPY would be one of the G10 currencies to benefit most from an unwinding of the AI boom in equities.”

His explanation turns on the currency protection attached to those investments:

“While the Nikkei has been a big beneficiary of the AI boom, there remains a strong negative correlation between the JPY and the Japanese bourse. Weaker Japan equities would cause foreign investors to experience falls in their exposures to JPY-denominated assets and lead to the unwinding of FX hedges.”

An investor who owns Japanese shares and has sold Yen forward to hedge them may need less protection after the shares lose value.

Reducing that currency position involves buying Yen, so the mechanism does not require the investor to sell the shares themselves.

Forrester also sees a threat to the other side of USD/JPY:

“USD/JPY would also be weighed down by weaker US technology stocks given a lot of the USD’s strength is tied to capital inflows into US equities.”

Japanese investors selling their American holdings could reinforce that pressure, although continued Japanese buying abroad has complicated the Yen recovery.

Bhargava writes: “Japan also holds large positions in tech-sensitive US assets, raising the potential for asymmetric moves should the repatriation story pick back up.”

Japanese selling abroad offers an early test

Friday’s Finance Ministry securities figures recorded ¥760.6 billion of net sales of foreign equities and investment-fund shares by major Japanese investors in the week to 10 October, reversing purchases the previous week.

Foreign investors were still net buyers of Japanese shares over that period.

The data therefore show some selling abroad before the latest turbulence, rather than evidence of a general liquidation of equity holdings on both sides.

They do not identify US technology sales or establish whether proceeds were converted into Yen.

Nor does Crédit Agricole see Japanese rate increases alone delivering a substantial Yen recovery:

“Continuing to drive the JPY in the background is the BoJ still moving to normalise rates. We still think this will be more of a neutral for USD/JPY than a negative, with the BoJ to only match the pace of Fed rate hikes.”

Japan’s own economy also benefits from AI demand.

In her Thursday speech in Kumamoto, BoJ policymaker Junko Koeda said AI-related exports had helped offset the deterioration in Japan’s terms of trade.

A sustained investment slowdown would put that support at risk, even if the initial portfolio response favoured the currency.

She also said “the appreciation of the yen as a safe-haven currency in times of crisis has become less evident in recent years”, citing depreciation when oil prices surged this spring.

The 22 October securities release covers the week containing the latest market turbulence, offering a closer test of whether Japanese investors’ selling abroad is gathering pace.

USD/JPY Exchange Rate FAQ

Why could falling Japanese shares strengthen the Yen?

Foreign investors may reduce currency hedges as their Japanese shareholdings lose value, buying Yen in the process.

Has Goldman’s desk issued a new USD/JPY forecast?

The note offers a conditional assessment of AI financing stress and currency hedging, rather than a new numerical house forecast.

What will the next Japanese securities figures show?

The 22 October release covers 11-17 October, providing a closer test of Japanese investors’ overseas selling during the latest turbulence. It will not establish whether proceeds were converted into Yen.