Crowded Bets on Japan's Stocks Spark Fresh Crash Fears

The Japanese stock market is facing increased concerns about another crash like the one in August 2024. The TOPIX index plummeted 24% between July and August that year, triggered by a rapid yen appreciation against the dollar, an unexpected rate hike by the Bank of Japan, and weaker-than-expected U.S. nonfarm payroll data.

According to Goldman Sachs analysts, while the probability of a sudden yen surge has declined, positioning in Japanese equities is now even more crowded than it was prior to the previous crash. Foreign net positions are over 20% higher, and hedge fund allocations have reached the 99th percentile over the past five years.

The market's current macroeconomic backdrop for the yen differs fundamentally from that of two years ago, significantly diminishing the conditions that previously triggered rapid yen appreciation. However, should an unexpected shock emerge from AI-related narratives or geopolitical developments, Japan's equity market has become more vulnerable than it was two years ago.