The Cost of "Saving the Yen": Will Japanese Stocks Repeat the Sharp Drop from Two Years Ago?

Will the Japanese stock market repeat the crash of August 2024?

Global investors have not forgotten the sharp drop from two years ago. From July to August 2024, the TOPIX fell 24% from its historical highs. The trigger was the rapid depreciation of the USD/JPY from 162 yen to 143 yen in less than a month, compounded by the Bank of Japan's unexpected rate hike and weaker-than-expected US non-farm payroll data. These multiple negative factors converged, plunging a market with heavily skewed long positions in exporters and financial stocks into the abyss. Now, with the yen continuing to weaken, market concerns have returned.

According to Zhuifeng Trading Desk, Bruce Kirk, an analyst on the Goldman Sachs Japan Equity Strategy team, pointed out that the macro environment facing the yen today is fundamentally different from two years ago, with significantly weakened conditions for a rapid yen appreciation. However, the crowding of equity positions—whether in terms of net foreign buying, hedge fund allocation ratios, or retail margin balances—has exceeded or is significantly higher than the levels in July 2024. The probability of a sudden currency crash has decreased, but if there is an unexpected shock to the AI narrative or geopolitics, the vulnerability of the Japanese stock market is actually higher than it was two years ago.

The core of this judgment lies in the fact that: If the risk stems from the yen, the issue has never been the starting or ending point of the exchange rate, but rather the speed of change. From January to March 2025, the USD/JPY gradually fell from 158 to 147, while the TOPIX rose by 5% during the same period. The crash in July 2024 was precisely triggered by a chain reaction caused by the yen strengthening rapidly by 11% in just three weeks. Currently, the market has hardly priced in a sudden strengthening of the yen—the one-month implied volatility of USD/JPY is at a relatively low level—so if an surprise occurs, the impact will be greater.

The Real Mechanism of the 2024 Crash: Not Exchange Rates, but a Chain Reaction of Stop-Losses

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

Phase 1 (July 11 to end of month): US CPI declined more than expected, and yen intervention drove related exporter sectors to fall first. The TOPIX Bank Index barely moved during this period, even rising 5% in a single day on July 31 when the Bank of Japan announced a rate hike.

Phase 2 (July 31 to August 5) was the real slaughter. The hawkishness of the Bank of Japan's rate hike exceeded expectations, followed by the collapse of US non-farm payroll data on August 2. Two independent negative narratives merged within 48 hours. Bank stocks plummeted 27% from their highs on the rate hike day to August 5, completely reversing the implicit bias of the market's long-short portfolios—long exporters and financials, short domestic defensive stocks.

Drawdown limits for multi-strategy hedge funds are typically set at 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 bias would suffer a peak-to-trough loss of approximately -5%, enough to trigger stop-loss lines. Stop-loss triggers → forced liquidation of positions → long-only funds forced to sell along → risk parity and CTA funds perceive momentum reversal and join the selling, forming a complete negative feedback loop.

Ultimately, after the TOPIX's single-day plunge on August 5, it rebounded 23% from the low point to September 3. The speed of the rebound itself illustrates the point: this was more of a liquidity crisis triggered by stop-losses than a repricing of the fundamentals of the Japanese stock market.

The Logic for Maintaining a Weak Yen Is More Solid Than in 2024

The set of "perfect storms" that caused the yen to suddenly reverse two years ago—expectations of Fed rate cuts exceeding forecasts, unexpected hawkish rate hikes by the Bank of Japan, and yen intervention—currently lacks the conditions for simultaneous occurrence.

The logic driving the current weakness of the yen has shifted. Before 2024, the US-Japan real interest rate differential could well explain the movement of USD/JPY. However, since the second half of 2025, following the LDP's defeat in the Japanese House of Councillors election and the ascent of the Sanae Takaichi administration, the market has begun to doubt the sustainability of Japan's fiscal policy—economic stimulus plans have pushed up JGB yields, but this upward movement largely reflects the continued widening of the term premium on Japanese government bonds relative to US Treasuries, rather than a narrowing of the US-Japan interest rate differential. The yield on 10-year Japanese government bonds has approached 3%, a level that has sparked discussions about the repatriation of Japanese pension assets, but the mainstream view is that if this process is gradual and well-telegraphed, it is unlikely to become a trigger for a crash similar to that of 2024.

The Goldman Sachs G10 FX Strategy team has raised its 3-month, 6-month, and 12-month forecasts for USD/JPY to 162, 163, and 165 respectively (previously 160, 158, and 155), citing "higher-for-longer US rates, low recession risk, concerns over Japanese fiscal sustainability, and the Bank of Japan's extremely slow path of rate hikes, which collectively support continued downward pressure on the yen."

Looking at CFTC holdings, the net short position of non-commercial speculators in the yen is close to the level of July 2024. But the difference this time is that the market has already priced in yen weakness—whereas the crash in July 2024 occurred precisely because the market had not previously priced in a sudden strengthening of the yen.

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

While macro factors favor maintaining a weak yen, vulnerability in the equity segment is quietly accumulating.

In terms of volume: The TOPIX and Nikkei 225 are 37% and 53% higher, respectively, than on July 11, 2024. Net foreign buying has seen a net inflow of approximately 14.8 trillion yen since Liberation Day in April 2025, and current net foreign positions are over 20% higher than before the crash in July 2024. Retail margin balances (margin buying balances) are 35% higher than in July 2024, approaching five-year highs. Goldman Sachs Prime Services data shows that hedge funds' total/net allocations to Japan as a proportion of their global portfolios are at the 99th and 98th percentiles, respectively, over the past five years.

Structurally: The gains in the TOPIX year-to-date are highly concentrated—a large number of constituent stocks remain below their 200-day moving averages, but the index has been driven higher by banks, steel and non-ferrous metals, electronics/precision instruments, and AI-related exporters. The Nikkei/TOPIX ratio (NT ratio) expanded to a historic 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 crash in July 2024: many portfolios implicitly held a bias towards long exporters and financials, and short domestic defensive stocks.

In the event of an unexpected shock, this structure means that selling pressure will transmit quickly and will be difficult to hedge in time.

The Real Tail Risk: Collapse of the AI Narrative or Geopolitical Black Swan

The probability of the yen itself causing a flash crash is lower than in 2024. A more alarming risk comes from another direction: any event that shakes the global AI growth narrative—similar to the sell-off triggered by DeepSeek in the first quarter of 2025—or a geopolitical shock sufficient to impact the narrative of "solid US-led global economic growth," would leave current highly crowded AI-related positions facing a situation similar to that of exporter positions in 2024.

The crash two years ago was characterized by many overseas investors ex post as a "Japan-specific problem." But at this moment, the Japanese stock market carries a highly concentrated expression of the global AI theme, with foreign and retail positions at historical highs. If the narrative reverses, what is exported may not just be a Japanese problem.