The price of "saving the yen": Will Japanese stocks repeat the big crash from two years ago?

Original Author: Zhao Ying

Original Source: Wall Street News

Will the Japanese stock market repeat the August 2024 crash?

Global investors have not yet forgotten the brutal selloff two years ago. From July to August 2024, the TOPIX index fell 24% from its all-time high, triggered by the USD/JPY rapidly depreciating from 162 to 143 in less than a month, compounded by the Bank of Japan's surprise rate hike and the weaker-than-expected US non-farm payroll data. This convergence of multiple bearish factors crushed a market heavily positioned long in exporters and financial stocks. Now, with the yen weakening again, market concerns are resurfacing.

According to a trading desk report, Goldman Sachs' Japan equity strategy analyst Bruce Kirk points out that the macro environment facing the yen today is fundamentally different from two years ago, and the conditions for a rapid yen appreciation are significantly weaker. However, stock market position crowding in terms of net foreign buying, hedge fund allocation ratios, and retail investors' margin balances has already exceeded or is significantly higher than the levels seen in July 2024. The probability of a currency flash crash has decreased, but if an unexpected shock to the AI narrative or geopolitics occurs, the Japanese stock market's vulnerability is actually greater than two years ago.

The core of this judgment lies in: If the risk comes from the yen, the issue has never been the starting or ending point of the exchange rate, but the speed of its movement. From January to March 2025, the USD/JPY gradually fell from 158 to 147, yet the TOPIX rose 5% over the same period. The crash in July 2024, in contrast, was a chain reaction triggered by the yen rapidly strengthening by 11% in just three weeks. Currently, the market has hardly priced in a sudden yen strengthening – the 1-month implied volatility for USD/JPY is relatively low – meaning any unexpected event could have a more significant impact.

The True Mechanism of the 2024 Crash: Not the Exchange Rate, but a Cascading Trigger of Stop-Losses

Reconstructing the internal logic of that crash is far more complex than the simple explanation of "yen appreciation hurting exporter profits."

Phase 1 (July 11 to end of July): Following weaker-than-expected US CPI and yen intervention, exporter-related sectors were the first to decline. The TOPIX bank index barely moved during this period and even rose 5% on July 31, the day the Bank of Japan announced its rate hike.

Phase 2 (July 31 to August 5) was the real carnage. The BOJ's rate hike was more hawkish than expected, and then the US non-farm payroll data collapsed on August 2. Two independent negative narratives converged within 48 hours. Bank stocks plummeted 27% from the rate hike day's peak to August 5. The implicit skew in the entire market portfolio – going long exporters and financials while shorting domestic defensive stocks – was completely reverse-crushed.

Drawdown limits for multi-strategy hedge funds are typically set around -2.5% of total deployed capital. In that market environment, a market-neutral portfolio with a seemingly low net exposure but a 5 percentage point sector skew would have incurred a peak-to-trough loss of about -5%, enough to trigger stop-loss limits. Stop-loss triggers led to forced liquidation, forcing long-biased funds to sell, and risk parity and CTA funds, sensing a momentum shift, joined the selling, forming a complete negative feedback loop.

Ultimately, after the single-day crash on August 5, the TOPIX rebounded 23% from its low to September 3. The speed of the rebound itself was telling: this was more a stop-loss-driven liquidity crisis than a fundamental re-pricing of Japanese equities.

The Logic for a Weaker Yen is More Robust Than in 2024

The "perfect storm" that caused the yen to abruptly turn two years ago – expectations of more aggressive Fed rate cuts, the BOJ's unexpectedly hawkish rate hike, and yen intervention – is unlikely to occur simultaneously now.

The logic driving the current yen weakness has shifted. Before 2024, the US-Japan real interest rate differential explained USD/JPY movements well. However, since the LDP's defeat in the Japanese Upper House election in the second half of 2025 and the rise of the Takichi Sanae administration, the market has begun to doubt Japan's fiscal sustainability. Economic stimulus plans have pushed up JGB yields, but this increase primarily reflects the persistent widening of Japan's bond term premium relative to US Treasuries, rather than a narrowing of the US-Japan interest rate differential. The 10-year JGB yield has approached 3%, a level that has sparked discussions about the repatriation of Japanese pension assets. However, the mainstream view is that if this process is gradual and well-communicated, it is unlikely to trigger a 2024-style crash.

Goldman Sachs' G10 FX strategy team has revised its 3-month, 6-month, and 12-month USD/JPY forecasts up to 162, 163, and 165 respectively (from 160, 158, and 155 previously), citing "higher for longer US rates, low recession risk, Japanese fiscal concerns, and an extremely gradual BOJ rate path, all supporting persistent yen depreciation pressure."

According to CFTC positioning data, the net short yen position of non-commercial speculators is close to the July 2024 level. However, the difference this time is that the market has already priced in a weak yen. The July 2024 crash occurred precisely because the market had not priced in a sudden yen strengthening at all.

Japanese Stock Positions Are More Crowded and Concentrated Than Two Years Ago

The macro backdrop is favorable for a sustained weak yen, but vulnerability on the equity side is quietly building.

Quantitatively: The TOPIX and Nikkei 225 are 37% and 53% higher, respectively, than on July 11, 2024. Since the Liberation Day tariff announcements in April 2025, net foreign buying has totaled approximately ¥14.8 trillion, and current net foreign positions are over 20% higher than before the July 2024 crash. Retail investors' margin borrowing balances are 35% higher than in July 2024, nearing five-year highs. Goldman Sachs prime services data shows that hedge funds' total/net allocation to Japan as a percentage of their global portfolios is at the 99th and 98th percentiles of the last five years, respectively.

Structurally: TOPIX gains this year have been highly concentrated. Many constituent stocks are still trading below their 200-day moving averages, but the index has been driven higher by banks, steel/non-ferrous metals, electronics/precision instruments, and AI-related exporters. The Nikkei/TOPIX ratio (NT ratio) expanded to an all-time high of 18 times in June this year, and the median valuation of AI-related stocks in the TOPIX is nearly double that of non-AI stocks. This mirrors the structure before the July 2024 crash: many portfolios implicitly held a skew of going long exporters and financials while shorting domestic defensive stocks.

In the event of an unexpected shock, this structure means selling pressure would propagate quickly and would be very difficult to hedge against in time.

The True Tail Risk: AI Narrative Collapse or Geopolitical Black Swan

The probability of a flash crash originating from the yen itself is lower than in 2024. A more concerning risk comes from another direction: any event that shakes the global AI growth narrative – similar to the DeepSeek-driven selloff in Q1 2025 – or a geopolitical shock sufficient to undermine the narrative of a "robust US-led global economic expansion" would expose the current highly crowded AI-related positions to a situation akin to the exporter positions in 2024.

The crash two years ago was characterized by many overseas investors ex-post as a "Japan-specific problem." At this moment, however, the Japanese stock market bears a highly concentrated expression of the global AI theme, with both foreign and retail positions at multi-year highs. If the narrative reverses, what gets exported might not just be Japan's problem.