Yen Rise Sets Off Global Liquidity Shock
The Japanese yen's rise has significant implications for global markets beyond currency fluctuations. Investors have borrowed cheaply in yen to invest in higher-yielding currencies and risk assets, but a sharp increase in the yen's value makes these trades less profitable and even loss-making. This can lead to forced deleveraging, where funds facing losses or higher margin requirements sell their most liquid and profitable holdings first.
Several equity markets are vulnerable to this liquidity shock, including AI semiconductors and memory producers like Nvidia, Broadcom, AMD, TSMC, Micron, SK Hynix, and Samsung Electronics. These companies have strong fundamentals but high expectations and crowded ownership, making them susceptible to forced selling.
Other areas at risk include expensive software and momentum stocks such as Palantir and Snowflake, Japanese exporters like Toyota and Honda, small caps and leveraged cyclicals, and REITs and rate-sensitive equities. A weaker Dollar adds another layer of complexity, as non-US investors may see reduced returns from US holdings even if the underlying shares rise.
A yen carry unwind can be a broad liquidity shock, but it's not necessarily a signal to exit equities entirely. Investors should reassess their leverage, concentration, and currency exposure in response to this development.