Japanese Stocks on Edge as Yen Weakness Sparks Crash Fears
The Japanese stock market is facing renewed concerns of a potential crash, reminiscent of the August 2024 debacle when the TOPIX index fell by 24% from its all-time high. The yen's recent weakening has sparked fears that history might repeat itself.
This time around, Goldman Sachs' Japan equity strategy analyst Bruce Kirk notes that while the macro environment is different from two years ago, the conditions for a rapid yen appreciation are weaker. However, market position crowding in terms of net foreign buying, hedge fund allocation ratios, and retail investors' margin balances has exceeded or significantly higher than the levels seen in July 2024.
Kirk argues that even if the risk comes from the yen, it's not the starting or ending point of the exchange rate but rather the speed of its movement. The current market has hardly priced in a sudden yen strengthening, with low implied volatility for USD/JPY, making any unexpected event more impactful.
A Goldman Sachs report emphasizes that the 2024 crash was not solely due to yen appreciation but rather a cascade of stop-loss triggers, forcing long-biased funds to sell and risk parity and CTA funds to join the selling. The market's vulnerability is greater now than two years ago, primarily because the current structure mirrors that before the July 2024 crash.
The report also highlights that the logic driving the current yen weakness has shifted, with Japan's fiscal sustainability being a growing concern. The mainstream view suggests that if the repatriation of Japanese pension assets is gradual and well-communicated, it will not trigger a 2024-style crash.