Goldman Sachs: Yen Regains "Safe Haven King" Status, Becomes Most Effective Tool to Hedge Against AI Market Shocks

Zhihu Finance APP reports that Goldman Sachs states the yen is becoming a more effective tool for hedging against AI-driven market shocks, as shifts in Japan’s policy environment have reduced the risk of the yen weakening sharply when global yields rise.

Strategists including Kamakshya Trivedi wrote in a report on October 23: "Although the global backdrop still supports further yen weakness, the yen now appears to be a more attractive hedging instrument in a pro-cyclical portfolio than in recent years."

This assessment comes after the yen once again displayed its traditional safe haven characteristics during last week’s global tech stock sell-off. On Thursday, the yen rose 0.9% against the US dollar and at one point on Friday hit its strongest level in more than a month, as concerns about the AI investment boom dragged equities lower and triggered a sharp rally in US Treasuries. Subsequently, as US Treasury yields stabilized, the yen gave back part of its gains.

Goldman Sachs believes that the AI boom makes the US stock market and the US dollar particularly sensitive to any deterioration in growth prospects. If a shock simultaneously depresses stocks and bond yields, it would create the kind of market environment historically most favorable for the yen.

Goldman Sachs also indicates that there are early signs the yen’s vulnerability to surging global yields is decreasing. Recently, the yen’s weakening response to rising yields has been more limited than in the past six or seven years. The strategists believe this likely reflects reduced depreciation pressure from changes in Japan’s domestic policy environment.

This marks a stark contrast to 2022—when the Bank of Japan maintained yield curve control (YCC) even as global borrowing costs soared. The change in this relationship means that even if carry trades remain negative yielding, the yen "should be a less painful hedge to hold."

A more constructive domestic policy environment, the yen’s undervalued levels, and rising risks of exchange rate intervention are also collectively limiting the potential upside for USD/JPY, thereby improving the asymmetry of holding the yen as a hedging tool.

In the short term, Goldman Sachs continues to favor shorting the euro against the yen, reasoning that there are virtually no clear domestic catalysts for a significant yen appreciation, and the threshold for the Bank of Japan to surprise markets with a hawkish message at its October 30 policy meeting is quite high.

However, in the longer term, these strategists see the USD/JPY trade as a more effective safeguard against deteriorating risk sentiment. They wrote: "Shorting USD/JPY should be the most effective tool for hedging overall growth volatility, especially that stemming from a broad AI shock."