Yen surges over 2%: Bank of Japan turns hawkish, USD/JPY exchange rate shows "tacit understanding" again, a conduit to U.S. AI tech stocks

Source: BIT Securities

Last Friday (September 4), the U.S. non-farm payroll data for August unexpectedly surged, with an increase of 162,000 jobs far exceeding market expectations, delivering a typical "dollar-friendly" data report. However, that evening, the foreign exchange market for the dollar against the yen did not respond positively: the USD/JPY exchange rate not only failed to rebound alongside rising U.S. Treasury yields but continued its depreciation trend from earlier in the week, briefly falling below the 155 mark. The yen appreciated by about 2.5% this week, marking the largest weekly increase since the joint intervention by the U.S. and Japan at the end of July. On the surface, the fluctuation in exchange rates is attributed to the Bank of Japan's rare and concentrated hawkish statements, as well as ongoing speculation about a "renewed tacit agreement on U.S.-Japan exchange rate policy." More importantly, this story, which seems to occur only in the Tokyo foreign exchange market, is actually being transmitted step by step across the Pacific, along the chain of yen financing costs, global carry trade unwinding, and tightening liquidity, into the pricing logic of U.S. AI and technology growth stocks over the past week.

1. Why does the USD/JPY exchange rate affect global capital markets?

The USD/JPY exchange rate indicates how many yen can be exchanged for one dollar. A larger number represents a cheaper yen (depreciation); a smaller number represents a "more expensive" yen (appreciation). This week, the USD/JPY fell from around 160 to around 155, which is a direct reflection of the yen's appreciation.

The reason this exchange rate continues to attract global investors' attention is not just due to Japan's economic size, but because the yen plays a special role as a "global financing currency" in the global financial system. For nearly thirty years, the Bank of Japan has maintained near-zero or even negative interest rates, allowing global financial institutions to borrow yen at extremely low costs, exchange them for dollars or other high-yield currencies, and invest in U.S. stocks, U.S. Treasuries, and emerging market assets, earning both interest rate differentials and asset appreciation. This is known as the "yen carry trade." Therefore, the USD/JPY exchange rate is viewed as a "barometer" of global risk appetite and liquidity conditions: as long as the yen remains low-interest and the exchange rate continues to depreciate, carry trades can continuously provide low-cost funding for global risk assets, especially U.S. technology growth stocks.

2. Market Review: The yen's "roller coaster" ride this week, more stimulating than last month's U.S.-Japan joint intervention?

Last week (September 1-4), the USD/JPY traced a clear downward curve: at the beginning of the week, it briefly surged to 160.39, the highest point since the U.S.-Japan joint intervention at the end of July; subsequently, against the backdrop of consecutive hawkish signals from Bank of Japan officials, it plummeted, with a nearly 2% drop on September 3, the largest single-day decline since the joint intervention; even last Friday, despite the U.S. non-farm data significantly exceeding expectations, the USD/JPY still failed to recover the 156 mark. Looking back at the joint market intervention on July 31, the USD/JPY quickly fell from 163.99 to around 155.23, a cumulative decline of about 5%; the effects of the intervention lasted less than a month, and by late August, the yen had depreciated again, approaching the 160 mark.

Extending the timeline, the last time the yen experienced a comparable intensity of fluctuation was in August 2024, when an unexpected interest rate hike by the Bank of Japan triggered a global unwinding of carry trades, leading to a nearly 20% drop in the Nikkei 225 index over three days. Although this round of yen appreciation has not yet evolved into a wave of asset sell-offs like in 2024, the absolute increase, triggering logic, and market vigilance regarding "whether officials will intervene again" have all reached a critical point that requires serious attention.

3. Why did the yen surge? A triple resonance of "central bank hawkishness + narrowing interest rate differentials + short covering"

This round of rapid yen appreciation is not driven by a single factor but is the result of three tightening threads.

Thread One: The Bank of Japan's concentrated hawkish statements. On September 2, Governor Kazuo Ueda stated that the monetary policy meeting on September 17-18 would assess upside risks to prices and expressed that "the financial environment remains accommodative, and we hope to continue raising interest rates"; committee member Takeda Hajime further adopted a hawkish stance, stating that they would "flexibly advance interest rate hikes" and did not rule out consecutive hikes, which Citigroup rated as their "strongest signal." As a result, the implied probability of a rate hike in September rose to between 94% and 99%, with the market essentially pricing in a 25 basis point hike on September 18, raising the policy rate to 1.25%—the shortest interval between rate hikes during Ueda's tenure (only about three months since June).

Thread Two: Rising Japanese bond yields compressing the U.S.-Japan interest rate differential. On September 1, the yield on Japan's 10-year government bonds surpassed 3%, reaching a new high since 1996; coupled with the Kishida government's "active fiscal" policies, the record budget for fiscal year 2027, and increased investments in semiconductors and AI, this has raised long-end issuance pressure and yield levels. The rise in yields and expectations of rate hikes resonate, directly compressing the U.S.-Japan interest rate differential and weakening the "cost-effectiveness" of yen carry trades.

Thread Three: Concentrated short covering of the yen. CFTC data shows that as of August 25, leveraged funds had a net short position of 81,600 contracts on the yen, and asset management institutions held 18,300 contracts; shorting the yen had previously been one of the most crowded trades globally. After the reversal of rate hike expectations and yields, the cost of short positions surged, leading to a self-reinforcing cycle of stop-loss covering—this also explains why, despite the non-farm data on September 4 being exceptionally strong (theoretically favorable for the dollar), and the probability of a Fed rate hike in September rising from around 50% to 58.6%, the yen still resisted declines and even strengthened: the intensity of rate repricing was far from sufficient to reverse the more severe repricing on the yen side.

4. From "Kishida Trade" to Intervention Dependency: The Deep Script Behind the Yen's Repeated Volatility This Year

This round of "roller coaster" trading in the yen may have begun laying the groundwork for "fiscal risks" since Kishida Fumio took office.

For a long time, U.S. influence over Japan has dominated the yen exchange rate: the USD/JPY and the yield differential between U.S. and Japanese 10-year government bonds have been almost a pair of "inseparable" twin curves, with the expansion and contraction of the interest rate differential highly correlated with yen depreciation and appreciation. However, recently, as the U.S.-Japan interest rate differential has narrowed, the yen has not strengthened in tandem. In contrast, the yield on Japan's 10-year bonds and 2-year bonds has continued to widen, with the market increasingly anxious about fiscal risk premiums: this has both depressed short-end yields and narrowed the interest rate differential, while directly eroding confidence in the yen, leading to simultaneous occurrences of "narrowing interest rate differentials" and "yen depreciation."

Kishida's active fiscal policy represents "Kishida Trade." Since taking office, Kishida has implemented a series of "responsible active fiscal" measures: massive bond issuance, tax cuts, and increased investments in strategic industries, representing the largest stimulus plan since the pandemic. Japan's government debt has rapidly become the highest in the world, accounting for about 263% of GDP, far exceeding the 142% during the Greek debt crisis. Wall Street and the market are all worried about further expanding deficits, and the market has voted with its feet, forming the recently discussed "Kishida Trade": selling Japanese bonds (betting that fiscal expansion will push up supply and inflation), shorting the yen (doubts about fiscal sustainability), and being bullish on Japanese stocks (a weak yen and stimulus benefiting corporate profits, with the Nikkei 225 briefly surpassing 50,000 points).

Official data reveals the true rhythm of "rising and falling." According to data from the Japanese Ministry of Finance, from April 28 to May 27 this year, approximately 11.73 trillion yen was injected, and from July 30 to August 26, another approximately 15.40 trillion yen was injected, totaling about 27.13 trillion yen, which has exceeded the total of interventions in 2022 and 2024 (about 24.5 trillion yen)—as long as the USD/JPY approaches 160, officials will almost always intervene. This has also been the key to previous rounds of "rallies followed by pullbacks": support has come more from official buying rather than fundamental improvements, and once official buying retreats, the market returns to the long-term pressures of fiscal risks and carry trades.

5. Where does the "U.S.-Japan Tacit Agreement" come from: A joint intervention not seen in 15 years.

At the end of July this year, the U.S. Treasury and the Japanese Ministry of Finance simultaneously confirmed a joint foreign exchange market intervention: on August 3, the Japanese Ministry of Finance officially confirmed coordination to buy yen and planned to use the FIMA repurchase facility in the future. On the day of the intervention, the USD/JPY quickly fell from 163.99 to around 155.23, rebounding nearly 4% within a week, marking the largest single-week increase in about two years; Trump described this move as "a reflection of friendship and beneficial to the world economy."

Recent actions: Yellen's triple signals. Entering September, U.S. Treasury Secretary Janet Yellen's public statements have been repeatedly interpreted by the market as further evidence of "pressuring the Bank of Japan to raise interest rates": on September 1, the U.S. Treasury issued a statement saying Yellen met with Bank of Japan Governor Kazuo Ueda, calling for "good monetary policy to avoid excessive exchange rate fluctuations," and "strongly supporting Japan's decisive market and monetary steps to address the substantial undervaluation of the yen," explicitly stating that "a weak yen exacerbates inflationary pressures within Japan"; subsequently, Yellen stated in an interview with CNBC that "I have information that the market does not," implying a considerable grasp of the actions the Bank of Japan is about to take; at the same time, she also publicly warned that if disorderly fluctuations occur in the yen market, it would trigger forced unwinding of carry trades, impacting global markets and ultimately raising borrowing costs for U.S. households and businesses.

6. Dissecting the Transmission Chain: How Yen Appreciation Gradually Affects U.S. AI Tech Stocks

For U.S. stock investors across the Pacific, fluctuations in the yen exchange rate may seem distant, but historical experience shows that its impact on U.S. stocks, especially long-duration, high-valuation AI and technology growth stocks, is often more direct and severe than imagined.

Historical reference: The "Black Monday" of August 2024. In July 2024, the Bank of Japan unexpectedly raised interest rates by 0.15 percentage points, directly triggering a global unwinding of yen carry trades: during the week of August 5, the Nikkei 225 index plummeted nearly 20% over three trading days, with a single-day drop of 12.4%, marking the largest single-day decline since the "Black Monday" of 1987; the South Korean stock market also fell over 10%; U.S. stocks were similarly affected, with Nvidia briefly dropping 14%, and Apple plunging 10% due to Buffett's significant reduction of related holdings, while the Nasdaq 100 index fell 5%, and Bitcoin simultaneously plummeted 15%. According to estimates by JPMorgan afterward, that round of unwinding ultimately cleared less than 60% of speculative positions, and risks were not fully cleared.

Transmission mechanism: A four-step chain from Tokyo to Silicon Valley. If the Bank of Japan raises interest rates and Japanese bond yields rise, the U.S.-Japan interest rate differential further compresses, leading to higher yen financing costs. Funds borrowing in yen to hold U.S. stocks or U.S. Treasuries would be forced to unwind, selling overseas assets and buying back yen to repay debts. Since these funds have long favored high-valuation, long-duration growth assets, leading AI and technology stocks in the U.S. market often bear the brunt, becoming the primary targets for forced selling. Additionally, domestic long-term funds in Japan, such as life insurance, banks, and pensions, seeing the yield on domestic 10-year government bonds return to 3%, may marginally reduce their allocations to overseas assets (especially U.S. Treasuries) or even see some funds flow back domestically, thereby exerting additional upward pressure on long-end U.S. Treasury yields and further raising the discount rates for U.S. growth stocks, creating a compounding effect with carry trade unwinding.

Current exposure: This "stock" is larger than in 2024. Various data indicate that the potential scale of carry trades this time exceeds the peak in 2024: the outstanding loans of Japanese residents to overseas borrowers have surpassed the 2024 peak, and loans from non-Japanese banks in Tokyo to their headquarters have reached the highest level since the global financial crisis. As of August 25, CFTC data shows that net short positions on the yen remain high and have not undergone substantial clearing. This means that if the policy path signals released by the Bank of Japan after September 18 are stronger than market expectations, it could trigger a larger-scale unwinding than in 2024.

7. Outlook for September 18: A 25 basis point rate hike is just the starting point; the real variable lies in the "path."

Although Japanese officials generally prefer a "conventional range with lower communication costs" of 25 basis points rather than a one-time large rate hike. However, what truly determines how far this round of yen appreciation and even global asset repricing can go is not the 25 basis points itself, but the policy path after the rate hike—whether to continue in a step-by-step manner or, as suggested by Takata Hajime, to open up the possibility of "continuous rate hikes" or even larger increments. After September 18, the story of the yen will no longer just be about Japan's monetary policy, but a systemic event that triggers a global repricing of funds, the spillover effects of which—whether they are gently released, accelerate the impact, or have already been completed in advance—still need further verification from next week's CPI data, the Bank of Japan's meeting minutes, and the latest CFTC position data.

Several verification signals worth continuous tracking are: first, whether the 10-year interest rate spread between the US and Japan and the USD/JPY exchange rate will resume moving in the same direction—if it does, it indicates that the traditional carry trade framework has regained dominance; second, the "2s10s" yield curve spread of Japanese government bonds and the auction demand for 30-year and 40-year bonds—if long-term yields continue to significantly underperform short-term yields, it indicates that the pressure of fiscal risk premium has not yet eased; third, the subsequent pace of rate hikes by the Bank of Japan, changes in real interest rates, and inflation expectations—only when the real returns on yen assets truly improve can the appreciation trend be sustained, rather than relying solely on sentiment and short covering; fourth, whether the funding sources, net new bond issuance scale, and tax reduction scope of the Sakamoto Finance Plan become clearer—this determines whether the market truly believes in the notion of "responsible active fiscal policy"; if the authorities intervene in the market again after September 18, observe the speed of market pullback—if it quickly falls back to the pre-intervention range within a few days or weeks, it indicates that the policy signal itself is still insufficient to reverse the fundamental pricing, and the yen is likely to continue to cycle through "intervention, rebound, pullback."

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