AI sell-off boosts demand for safe havens, Japanese bonds and yen rise together

According to Zhitong Finance APP, the sell-off in technology stocks has deepened, prompting investors to flock to traditional safe-haven assets including the yen, Japanese government bonds, and US Treasuries. The yen extended its gains, rising to its strongest level in over a month.

After maintaining a narrow range against the US dollar for several weeks, the yen broke out of this range in the past 24 hours and is now trading at levels last seen since September 18—the day when the Bank of Japan raised interest rates. On Friday, the yen climbed as much as 0.4% to 156.08 yen per dollar, after surging 0.9% on Thursday.

Asian equities followed US stocks lower as investors continued to rotate out of technology shares. Japan’s benchmark 10-year government bond saw a significant rally, pushing yields down 10 basis points to 2.78%, while 20-year yields fell 6 basis points. US Treasury bonds maintained most of Thursday's gains. Japanese government bond yields declined across the entire curve on Friday.

Why Is the Yen Returning as a Safe-Haven Asset?

“This week’s earnings reports from major US tech companies have cast doubt on the AI-driven US growth narrative, making the yen a more attractive safe-haven than the dollar,” said Carol Kong, a strategist at Commonwealth Bank of Australia. She added that if unwinding of tech stock positions intensifies, the US dollar may continue to weaken against the yen.

This shift marks a reversal for the currency—which in recent years has struggled to consistently benefit from its traditional role as a safe-haven. In times of market stress, wide interest rate differentials and Japan’s substantial overseas investments have often outweighed demand for the yen. Additionally, reports that Bank of Japan officials are inclined to keep rates unchanged at this month’s meeting have dampened expectations for imminent tightening.

The "US-centric" nature of the latest sell-off may be altering this dynamic. “Dollar selling, driven by the waning of the ‘US exceptionalism’ narrative, is offsetting the safe-haven demand for the dollar,” noted Tom Nakamura, Head of Fixed Income and FX at AGF Investments Inc. He expects the yen could strengthen further in the short term, potentially reaching 156 per dollar.

Bond Market: Bonds Are Acting Like Bonds Again

“Bonds are acting like bonds again,” said Masahiko Loo, Senior Fixed Income Strategist at State Street Global Advisors in Tokyo. “When risk assets are volatile, duration offers diversification, and investors are finally able to collect coupon income while they wait.”

Japanese government bond yields had previously surged to multi-decade highs earlier this month on worries over inflation, fiscal spending, and a global bond market sell-off, but have since retreated. Friday's bond rally came even as data showed key Japanese inflation metrics broke above the Bank of Japan’s 2% target for the first time this year—a development that would normally support expectations for a December rate hike. Loo commented that as the market’s focus shifts to growth risks and concerns surrounding AI, inflation data has moved to the background.

“Today’s sharp decline in short- and medium-term yields also suggests that, if declines in AI stocks and renewed European debt worries spark sustained financial market shocks, the market is pricing in the possibility that the Bank of Japan may delay a rate hike,” said Ryutaro Kimura, Senior Bond Strategist at BNP Paribas Asset Management.

Analysts noted that as the yield curve continues to flatten, new (actively traded) Japanese government bonds are no longer offering 4% yields; demand for safe assets is outweighing the impact of CPI data. He also noted that the dollar is weakening against the yen, with the 155 level now in sight.

Crosses and Options

The yen’s appeal is not limited to the dollar: it rose 0.3% against the Swiss franc and 0.3% against the euro, as French fiscal concerns and high energy prices weighed on the euro.

Option traders have also become more bullish on the yen, as reflected in the one-month dollar-yen risk reversal. This shift suggests investors are increasingly positioning for short-term strength in the yen—even as strategists continue to debate whether the recent rally is primarily driven by safe-haven flows or by emerging Japanese domestic capital support.

The Next Test: Two Central Banks Next Week

This round of gains comes ahead of policy meetings by both the Bank of Japan and the Federal Reserve next week, which will provide another test for the yen. The market broadly expects the Bank of Japan to hold rates steady, while overnight index swap (OIS) pricing shows about a 67% probability of a rate hike by December.

However, some analysts caution that the latest moves may not mark the start of a sustained yen appreciation trend. “With central bank meetings next week and midterm elections to follow, I currently don’t see this developing into a lasting yen uptrend,” said Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation.