Goldman Sachs Names Yen as Best Hedge Against AI Crisis

According to analysts at Goldman Sachs, Japan's new policy makes the yen less vulnerable to decline amid rising global yields. The bank now considers the yen an effective hedge against market shocks related to artificial intelligence. These conclusions emerged after the tech sector's collapse, which caused Japan's Nikkei 225 index to drop significantly below record levels: the biggest losses in Tokyo last week were suffered by chip manufacturers and AI-related companies.

The index closed at 62,693.16 on October 23, approximately 14% below the record close of 73,007. On October 22, the Nikkei fell by 2.65% and recorded the weakest close since July 30; the TOPIX index fell by 1.14% that day. Over the past month, the Nikkei lost 5.2%.

On October 22, the yen's exchange rate against the dollar rose by 0.9% amid a decline in U.S. Treasury yields, Bloomberg reports. By October 23, the yen reached its highest level in more than a month. "The yen now appears to be a more attractive hedging tool for pro-cyclical portfolios than in recent years, although the global environment still suggests further weakening of the JPY," strategists wrote.

Why holding the yen has become easier

According to the bank's analysts, the AI boom has made U.S. stocks and the dollar vulnerable in the event of growth slowdown. The simultaneous decline in stocks and bond yields is a combination that has historically supported the yen. The bank explained the yen's weak reaction to rising bond yields by Japan's domestic policy.

In the long term, strategists named one trade: "Short USD/JPY is the most effective hedge against both a general economic growth deterioration and a potential broad AI-related shock." In the near term, Goldman still expects the global situation to contribute to further yen weakening; they currently find selling the euro against the yen more profitable.

December as a test of the forecast

December rate decisions will be a test of this forecast. According to a Bloomberg survey, 83% of economists expect the Bank of Japan to raise the rate to 1.25% in December; the Federal Reserve is also expected to raise the rate in December. If both regulators raise rates by a quarter percentage point, the difference between U.S. and Japanese rates will remain virtually unchanged. Then the yen's reaction to rising U.S. yields will show whether the weakening of the Japanese currency has passed.