The Cost of 'Saving the Yen': Will Japanese Stocks Repeat the Sharp Drop from Two Years Ago?
Complete. Here is the key summaryGoldman Sachs analysts point out that although the probability of a rapid yen appreciation has decreased, positioning in the Japanese stock market is more crowded than before the 2024 crash. If unexpected shocks arise from AI narratives or geopolitics, market vulnerability could be even higher. The main cause of the 2024 plunge was a chain reaction of stop-loss orders triggered by the yen's rapid strengthening, rather than simple exchange rate fluctuations. Currently, the market is underpricing yen volatility, posing significant potential risks
Will the Japanese stock market repeat the crash of August 2024?
Global investors have not forgotten the sharp drop from two years ago. From July to August 2024, the TOPIX fell 24% from its historical highs. The trigger was the USD/JPY plummeting from 162 yen to 143 yen in less than a month, compounded by the Bank of Japan's unexpected interest rate hike and weaker-than-expected US non-farm payroll data. These multiple negative factors converged, driving a market with heavily long-biased positions in exporters and financial stocks into the depths. Now, with the yen continuing to weaken, market concerns have resurfaced.
According to Zhuifeng Trading Desk, Bruce Kirk, an analyst on Goldman Sachs' Japan Equity Strategy team, pointed out that the macroeconomic environment facing the yen today is fundamentally different from two years ago, with conditions triggering rapid yen appreciation significantly weakened. However, equity positioning crowding—whether in terms of net foreign buying, hedge fund allocation ratios, or retail margin balances—has exceeded or is significantly higher than levels in July 2024. The probability of a flash crash in the exchange rate has declined, but if unexpected shocks occur in AI narratives or geopolitics, the vulnerability of the Japanese stock market is actually higher than it was two years ago.
The core of this judgment lies in the fact that: If the risk stems from the yen, the issue has never been the starting and ending points of the exchange rate, but the speed of change. From January to March 2025, the USD/JPY gradually fell from 158 to 147, while the TOPIX rose by 5% during the same period. In contrast, the crash in July 2024 was precisely a chain reaction triggered by the yen's rapid 11% strengthening within just three weeks. Currently, the market has hardly priced in a sudden strengthening of the yen—the one-month implied volatility of USD/JPY is at a relatively low level—so if an unexpected event occurs, the impact will be greater.
The True Mechanism of the 2024 Crash: Not Exchange Rates, but a Chain Reaction of Stop-Losses
Reconstructing the internal logic of that crash is far more complex than the superficial explanation that "yen appreciation suppressed exporter profits."
Phase 1 (July 11 to end of month): US CPI declined more than expected, and yen intervention took place, leading exporter-related sectors to fall first. The TOPIX Bank Index barely moved during this period, even rising 5% in a single day on July 31 when the Bank of Japan announced an interest rate hike.
Phase 2 (July 31 to August 5) was the real slaughter. The Bank of Japan's interest rate hike was more hawkish than expected, followed by the collapse of US non-farm payroll data on August 2. Two independent negative narratives converged within 48 hours. Bank stocks plunged 27% from their highs on the rate hike day to August 5. The implicit skew of the entire market's long-short portfolios—long exporters and financials, short domestic defensive stocks—was completely reversed and crushed.
Drawdown limits for multi-strategy hedge funds are typically set at around -2.5% of total deployed capital. In that market environment, a market-neutral portfolio with a seemingly low net exposure but a 5 percentage point sector skew would suffer a peak-to-trough loss of approximately -5%, enough to trigger stop-loss lines. Stop-loss triggers → forced liquidation of positions → long-only funds forced to sell along with them → risk parity and CTA funds perceiving momentum reversal and joining the sell-off, forming a complete negative feedback loop.
Ultimately, after the TOPIX's single-day plunge on August 5, it rebounded 23% from the low point to September 3. The speed of the rebound itself illustrates the point: this was more of a liquidity crisis triggered by stop-losses than a repricing of the fundamentals of the Japanese stock market.
The Logic for a Weak Yen Is More Solid Than in 2024
The set of "perfect storms" that caused the yen to suddenly reverse two years ago—expectations of larger-than-expected Fed rate cuts, the Bank of Japan's unexpected hawkish rate hike, and yen intervention—does not currently have the conditions to occur simultaneously.
The logic driving the current weakness of the yen has shifted. Before 2024, the real interest rate differential between the US and Japan could well explain the movement of USD/JPY. However, since the Liberal Democratic Party's defeat in the Japanese House of Councillors election in the second half of 2025 and the ascent of the Sanae Takaichi administration, the market has begun to doubt the sustainability of Japan's finances. Economic stimulus plans have pushed up JGB yields, but this rise largely reflects the continued widening of the term premium on Japanese government bonds relative to US Treasuries, rather than a narrowing of the US-Japan interest rate differential. The yield on 10-year Japanese government bonds has approached 3%, a level that has sparked discussions about the repatriation of Japanese pension assets. However, the mainstream view is that if this process is gradual and well-telegraphed, it is unlikely to become a trigger for a 2024-style crash.
Goldman Sachs' G10 FX Strategy team has raised its 3-month, 6-month, and 12-month forecasts for USD/JPY to 162, 163, and 165 respectively (previously 160, 158, and 155), citing that "higher-for-longer US rates, low recession risk, concerns over Japanese fiscal sustainability, and the Bank of Japan's extremely slow hiking path collectively support continued downward pressure on the yen."
Judging from CFTC holdings, the net short position of non-commercial speculators in the yen is approaching the level of July 2024. But the difference this time is that the market has already priced in yen weakness—whereas the crash in July 2024 occurred precisely because the market had not previously priced in a sudden strengthening of the yen at all.
Japanese Stock Positions Are More Crowded and Concentrated Than Two Years Ago
Macroeconomic factors favor maintaining a weak yen, but vulnerability in the equity segment is quietly accumulating.
In terms of volume: The TOPIX and Nikkei 225 are 37% and 53% higher, respectively, than on July 11, 2024. Net foreign buying has seen a net inflow of approximately 14.8 trillion yen since Liberation Day in April 2025, and the current net foreign position is more than 20% higher than before the crash in July 2024. Retail margin balances (margin buying balances) are 35% higher than in July 2024, nearing a five-year high. Goldman Sachs Prime Services data shows that hedge funds' gross and net allocations to Japan as a proportion of their global portfolios are at the 99th and 98th percentiles, respectively, over the past five years.
Structurally: The gains in the TOPIX this year have been highly concentrated—a large number of constituent stocks remain below their 200-day moving averages, but the index has been driven higher by banks, steel and non-ferrous metals, electronics/precision instruments, and AI-related exporters. The Nikkei/TOPIX ratio (NT ratio) expanded to a historical high of 18 times in June this year, and the median valuation of AI-related stocks in the TOPIX is now close to twice that of non-AI stocks. This mirrors the structure before the crash in July 2024: many portfolios implicitly held a skew of being long exporters and financials and short domestic defensive stocks.
Once hit by an unexpected shock, this structure means that selling pressure will transmit rapidly and will be difficult to hedge in time.
The Real Tail Risk: Collapse of the AI Narrative or Geopolitical Black Swans
The probability of the yen itself causing a flash crash is lower than in 2024. A more worrisome risk comes from another direction: any event that shakes the global AI growth narrative—similar to the sell-off triggered by DeepSeek in the first quarter of 2025—or a geopolitical shock sufficient to impact the narrative of "solid US-led global economic growth," would leave the current highly crowded AI-related positions facing a situation similar to that of exporters in 2024.
The crash two years ago was characterized by many overseas investors ex-post as a "Japan-specific problem." But at this moment, the Japanese stock market carries a highly concentrated expression of the global AI theme, with foreign and retail positions at historical highs. If the narrative reverses, what is exported may not just be a Japanese problem.
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