A rising yen can start as a currency move but spill into a broader liquidity squeeze when leveraged carry trades are cut and yen funding is repaid. This is not automatic: the rate gap still favours carry, with the US policy rate at 3.50–3.75% versus around 1% in Japan, though the backdrop is shifting as the Bank of Japan normalises policy. In equities, the main transmission is forced deleveraging, where funds sell liquid winners first, even if fundamentals are unchanged, and returns for non‑US holders can also be hit if yen strength evolves into wider US‑dollar weakness. A US share price gain of 10% paired with a 5% dollar fall leaves roughly a 4.5% return in euros.
Key Vulnerabilities in the Market
Five fault lines stand out: crowded AI semiconductors and memory; expensive software and momentum names; Japanese exporters sensitive to translation effects and competitiveness; small caps and leveraged cyclicals such as the Russell 2000; and rate‑sensitive REITs and related equities.
Indicators to Watch and Recent Market Moves
Watch for yen appreciation alongside higher volatility, weakening carry crosses such as AUD/JPY, poorer semiconductor breadth, wider credit spreads, foreign outflows from Asia, broader dollar declines and long‑term yields staying high even as shares drop. In August 2024, the TOPIX fell 12% in one session and the S&P 500 lost 3%, before rebounding as forced selling faded.
