Source: BIT Securities

Last Friday (September 4), the U.S. non-farm employment data for August unexpectedly strengthened — adding 162,000 jobs far exceeded market expectations, delivering a typical "dollar-friendly" data report. However, in the forex market that night, the dollar against the yen did not get the memo: the USD/JPY exchange rate not only failed to rebound as U.S. Treasury yields rose but continued the depreciation trend observed throughout the week, briefly falling below the 155 mark. The yen appreciated by approximately 2.5% this week, the largest weekly increase since the U.S.-Japan joint intervention at the end of July. On the surface, the fluctuation in the exchange rate can be attributed to the rare and intense hawkish statements from the Bank of Japan, as well as ongoing speculation about a "reconciliation of currency policies" between the U.S. and Japan; more importantly, this story, which seems to be occurring solely in the Tokyo forex market, is actually gradually transmitting across the Pacific — step by step influencing the pricing logic of U.S. AI and tech growth stocks over the past week.

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

The meaning of the USD/JPY is how many yen one unit of dollar can be exchanged for. A larger number indicates a weaker yen (depreciation); a smaller number indicates a "stronger" 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 only due to the size of the Japanese economy but also because the yen plays a special role as a "global funding currency" in the global financial system. For nearly thirty years, the Bank of Japan has maintained near-zero or even negative interest rates, leading global financial institutions to habitually borrow yen at extremely low costs, exchange them for dollars or other high-yield currencies, and invest in U.S. stocks, U.S. treasury bonds, and emerging market assets to earn both interest differentials and asset appreciation. This is known as "yen carry trade." Therefore, the USD/JPY exchange rate is considered a "barometer" of global risk appetite and liquidity: as long as the yen maintains low interest rates and a stable depreciation of the exchange rate, the carry trade can continually provide low-cost funds to global risk assets, especially U.S. tech growth stocks;

2. Market Review: Yen's Weekly "Roller Coaster," More Stimulating than Last Month's U.S.-Japan Joint Intervention?

Last week (September 1-4), the USD/JPY followed a clear downward trend: at the beginning of the week, it surged to 160.39, the highest point since the U.S.-Japan joint intervention at the end of July; then, against the backdrop of consecutive hawkish signals from Bank of Japan officials, it sharply declined, with a nearly 2% drop on September 3, marking the largest single-day drop since the intervention; by last Friday, despite the significantly better-than-expected U.S. non-farm data that night, the USD/JPY still failed to recover the 156 mark. Looking back at the joint forex market intervention by Japan and the U.S. on July 31: on the day of the intervention, the USD/JPY quickly fell from 163.99 to around 155.23, a cumulative drop of about 5%; the impact of the intervention lasted less than a month, as the yen once again depreciated, nearing the 160 mark in late August.

When viewed over a longer timeline, the last time the yen showed volatility comparable to this round's intensity was in August 2024 when an unexpected rate hike by the Bank of Japan triggered closures of global carry trades, resulting in the Nikkei 225 index plunging nearly 20% over three days — though the current round of yen appreciation has yet to evolve into an asset sell-off similar to 2024, the absolute price increase, the logic for its triggering, and the market's wariness about "official intervention" have all reached a critical point that warrants 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 was not driven by a single factor, but a result of three lines of influence tightening simultaneously.

Clue One: Intensified Hawkish Stance from the Bank of Japan. On September 2, Governor Kazuo Ueda stated that the September 17-18 monetary policy meeting would assess the risk of rising prices and said, "The financial environment is still relatively loose, and we hope to continue raising interest rates"; committee member Takeda Soichiro has further taken a hawkish stance, stating that they would "flexibly promote interest rate hikes," not ruling out consecutive hikes, which Citi described as its "strongest signal." As a result, the implied probability of a rate hike in September reached as high as 94%-99%, with the market basically pricing in a 25-basis point hike on September 18, pushing the policy rate to 1.25%—marking the shortest interval between hikes during Ueda's tenure (only about 3 months since June).

Clue 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 exceeded 3%, reaching the highest level since 1996; coupled with Prime Minister Kishida Fumio's government pursuing "active fiscal policies," and the record budget for FY2027 increasing investment in semiconductors and AI, it has led to upward pressure in long-end issuance and a central increase in yields. The rise in yields and expectations for rate hikes resonate, directly compressing the U.S.-Japan interest rate differential and weakening the "cost-effectiveness" of the financing side of yen carry trade.

Clue 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 in yen, and asset managers held 18,300 contracts, indicating that shorting the yen was one of the most crowded trades globally. After the interest rate hike expectations and yields were synchronized in reversal, the cost of short positions suddenly increased, and stop-loss covering formed a self-reinforcing cycle—this also explains why on September 4, despite the non-farm data being significantly positive (theoretically favorable for the dollar), and that night the Fed's probability of a September rate hike rose from around 50% to 58.6%, the yen still showed resistance to downside and even strengthened: the force of re-pricing of rates was far from sufficient to reverse a more intense re-pricing on the yen side.

4. From "Kishida Trades" to Intervention Dependence: The Deep Scripts of Yen's Repeated Surges and Drops This Year

This round of yen's "roller coaster" market may have begun to lay the groundwork for "fiscal risk" since Kishida Fumio took office.

For a long time, the influence of the U.S. on Japan has dominated the yen's exchange rate: the USD/JPY and U.S.-Japan 10-year Treasury yield spread have been almost a pair of "inseparable" twin curves, with the enlargement and contraction of interest rate differentials closely related to yen's depreciation and appreciation. However, recently, the U.S.-Japan interest rate differential has narrowed, yet the yen has not simultaneously strengthened. Conversely, the yield on Japan's 10-year bonds compared to its 2-year yields has continued to widen, and the market is increasingly anxious about the premium for fiscal risk: this both suppresses the short end, narrows the spread, and directly erodes confidence in the yen, leading to simultaneous occurrences of "narrowing interest rate differentials" and "yen depreciation."

Kishida's active fiscal policies reflect "Kishida Trades." Since Kishida took office, he has implemented a series of "responsible active fiscal" policies: massive borrowing, tax cuts, and increased investment in strategic industries, which constitute the largest stimulus plan since the pandemic. Japan's government debt has quickly become the highest among countries globally, accounting for about 263% of GDP—far exceeding the 142% during the Greek debt crisis. Wall Street and the market are all concerned about the further expansion of the deficit, and the market is voting with its feet, forming the recently discussed "Kishida Trade": selling Japanese bonds (betting on fiscal expansion to push up supply and inflation), shorting the yen (doubting fiscal sustainability), and being bullish on Japanese stocks (weak currency and stimulus benefits corporate profits, with the Nikkei 225 briefly surpassing 50,000 points).

Official data reveal the real rhythm of "rise and fall." Data from Japan's Ministry of Finance shows that from April 28 to May 27 this year, approximately 11.73 trillion yen was invested, and from July 30 to August 26, another approximately 15.40 trillion yen was reinvested, totaling about 27.13 trillion yen, which has surpassed the total amount of interventions in 2022 and 2024 (approximately 24.5 trillion yen) — as long as the USD/JPY approaches 160, the authorities have almost always intervened. This has been the key to the previous rounds of "rebound and retreat": support mostly came from official buying rather than fundamental improvements; once the buying pressure retreats, the market returns to the long-term pressures of fiscal risk and carry trade.

5. Where does the "U.S.-Japan Understanding" come from: A Joint Intervention Not Seen in 15 Years

At the end of July this year, the U.S. Treasury and Japan's Ministry of Finance simultaneously confirmed a joint forex intervention: the Japanese Ministry of Finance officially confirmed on August 3 that it coordinated the purchase of yen and planned to use FIMA repurchase facilities in the future. On the day of intervention, the USD/JPY quickly fell from 163.99 to around 155.23, rebounding nearly 4% in a week, marking the largest single-week increase in about two years; Trump referred to this action as "a reflection of friendship that benefits the global economy."

Recent Moves: Three Signals from Yellen. Entering September, U.S. Treasury Secretary Yellen's public statements have been repeatedly interpreted by the market as further evidence of "pressuring the Bank of Japan to raise rates": on September 1, the U.S. Treasury issued a statement saying Yellen met with Bank of Japan Governor 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," bluntly stating that "a weak yen has intensified domestic inflationary pressures in Japan"; subsequently, Yellen stated in an interview with CNBC that "I have information that the market does not have," implying a solid understanding of the actions the Bank of Japan is about to take; at the same time, she prominently warned that if the yen market experiences disorderly fluctuations, it would trigger forced closures of carry trades, further impacting global markets, ultimately raising borrowing costs for U.S. households and businesses.

6. Transmission Chain Breakdown: 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 tech growth stocks, is often more direct and more severe than expected.

Historical Reference: The "Black Monday" of August 2024. In July 2024, the Bank of Japan unexpectedly raised rates by 0.15%, directly triggering a global closure of yen carry trades: during the week of August 5, the Nikkei 225 index plunged nearly 20% over three trading days, with a single-day drop of 12.4%, the largest since the 1987 "Black Monday"; the South Korean stock market also fell over 10%; U.S. stocks were not spared, with Nvidia dropping as much as 14%, and Apple plunging 10% due to Buffett significantly reducing related holdings, while the Nasdaq 100 index fell by 5%, and Bitcoin also plummeted by 15%. According to estimates by JPMorgan afterward, that round of liquidations ultimately only cleared less than 60% of speculative positions, and the risk was not fully eliminated.

Transmission Mechanism: A Four-Step Chain from Tokyo to Silicon Valley. If the Bank of Japan raises rates and Japanese bond yields rise, the U.S.-Japan interest rate differential continues to compress, the financing cost of the yen increases, and funds borrowing in yen to hold U.S. stocks or U.S. treasury bonds will have to be forcibly liquidated, selling overseas assets and buying back yen to repay debts. Since these funds have a long-standing preference for high-valuation, long-duration growth assets (whose pricing is most sensitive to risk-free rates and liquidity), the AI and tech leaders in U.S. stocks often bear the brunt, becoming the main targets for liquidations. Additionally, long-term funds in Japan like life insurance, banks, and pensions, seeing the domestic 10-year bond yield return to 3%, will marginally reduce allocations to overseas assets (especially U.S. treasury bonds) and even repatriate some funds back to Japan, thus creating additional upward pressure on the long-end yields of U.S. treasury bonds, further increasing the discount rates for U.S. growth stocks, and forming a compounded effect with carry trade liquidations.

Current Exposure: This "Stock" is Larger than in 2024. Various data indicate that this round of potential carry trade scale 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 head offices have reached the highest level since the global financial crisis. As of August 25, CFTC data indicates that net short positions in yen remain high and have not undergone substantial liquidation. This means that if the policy signals released by the Bank of Japan after September 18 are stronger than market expectations, it cannot be ruled out that it may trigger a larger scale of liquidations than in 2024.

7. Outlook for September 18: A 25 Basis Point Hike is Just the Starting Point, the Real Variable is the "Path"

Although Japanese officials generally lean towards "regular increments with lower communication costs" of 25 basis points rather than a significant one-time rate hike, the true determinant of how far this round of yen appreciation and even the global asset repricing can go is not the 25 basis points itself but the policy path after the rate hike — whether it continues steadily or, as suggested by Takeda Soichiro, opens the possibility of "consecutive rate hikes" or even larger increments. After September 18, the yen's narrative will no longer be just a story of Japan's monetary policy but a systemic event that triggers the repricing of global capital; whether the spillover effects are mild releases, accelerated impacts, or already completed in advance, will still require further validation from next week's CPI data, the Bank of Japan meeting minutes, and the latest CFTC positions.

Several validation signals worth continuous tracking moving forward: First, whether the U.S.-Japan 10-year interest rate differential and USD/JPY will resume moving in the same direction — if they do, it indicates that the traditional carry trade framework has reestablished dominance; second, regarding the "2s10s" yield spread of Japanese government bonds and the auction demand for 30-year and 40-year bonds — if long-end yields persistently significantly underperform short-end ones, it indicates that the pressure from fiscal risk premiums remains unresolved; third, the subsequent interest rate hike pace from the Bank of Japan, and changes in real rates and inflation expectations — only when the real returns on yen assets genuinely improve can the appreciation trend continue, rather than being dependent solely on sentiment and short covering support; fourth, the funding sources, net new issuance of bonds, and the scope of tax cuts for Kishida's fiscal plans require further clarification — this determines whether the market genuinely believes in the notion of "responsible active fiscal policy"; if the authorities intervene in the market again after September 18, monitoring the speed of market pullbacks — if it quickly falls back to pre-intervention ranges within days or weeks, it indicates that the policy signals are still insufficient to reverse fundamental pricing, and the yen is likely to continue revolving within the cycle of "intervention, rebound, and pullback."

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