The cost of "saving the yen": Will Japanese stocks repeat the sharp decline of two years ago?
```
Will the Japanese stock market repeat the crash of August 2024?
That crash two years ago is still fresh in the minds of global investors. From July to August 2024, TOPIX fell 24% from a historic high, triggered by the US dollar dropping sharply from 162 yen to 143 yen in less than a month, compounded by an unexpected rate hike by the Bank of Japan and weaker-than-expected US nonfarm payroll data. Multiple bearish factors concentrated and detonated, sending a market heavily tilted toward exporters and financial stocks into freefall. Now, with the yen continuing to weaken, market concerns have returned.
According to Wind Chaser Trading Desk, Bruce Kirk, an analyst with Goldman Sachs Japan Equity Strategy Team, points out that the current macro environment facing the yen is fundamentally different from two years ago, and the conditions for a rapid yen appreciation have significantly weakened; however, equity-side crowded positioning, whether in terms of net foreign inflows, hedge fund allocation ratios, or retail margin balances, have all surpassed or are significantly higher than July 2024 levels. The probability of a flash crash in the exchange rate has decreased, but if there is an unexpected shock in the AI narrative or geopolitics, the fragility of the Japanese stock market is actually greater than two years ago.
The core of this judgment is: If the risk comes from the yen, the problem is never the starting or ending level of the exchange rate, but the speed of change. From January to March 2025, the USD/JPY slipped gradually from 158 to 147, and TOPIX actually rose 5% during the same period. But the July 2024 crash was precisely a chain reaction triggered by the yen rallying 11% in just three weeks. At present, the market is barely pricing the risk of a sudden yen surge—USD/JPY 1-month implied volatility remains low—so if a surprise occurs, the impact will be even greater.
The real mechanism of the 2024 crash: not the exchange rate, but the chain reaction of stop losses
The internal logic behind that crash is much more complex than the surface-level explanation of "yen appreciation hurting exporter profits".
Phase 1 (July 11 to end of month): US CPI came in below expectations and yen intervention led exporter-related sectors to fall first. TOPIX Bank Index barely moved during this period, and even rallied 5% on July 31 when the Bank of Japan announced a rate hike.
Phase 2 (July 31 to August 5) was the real bloodbath. The Bank of Japan's hawkishness on rates far exceeded expectations; then, on August 2, US nonfarm payrolls collapsed. Two independent negative narratives converged within 48 hours. From the rate hike day high to August 5, bank stocks plunged 27%. The entire market's hidden long-short bias—long exporters and financials, short domestic defensives—was brutally reversed.
Multi-strategy hedge funds usually set drawdown limits around -2.5% of total capital deployed. In that market environment, a seemingly not high net exposure but with a 5-point sector tilt in a market-neutral portfolio would have suffered a peak-to-trough loss of around -5%, enough to trigger stop-loss lines. Stop losses trigger – forced liquidation – long funds are forced to sell – risk parity and CTA funds sense the momentum reversal and join the selloff, forming a complete negative feedback loop.
Eventually, after TOPIX's one-day crash on August 5, it rebounded 23% from the low to September 3. The speed of the rebound itself tells the story: this was more a liquidity crisis triggered by stop-losses than a fundamental repricing of Japanese stocks.
The logic for the yen remaining weak is more solid than in 2024
The set of "perfect storm" catalysts that made the yen suddenly reverse two years ago—Fed rate cut expectations, an unexpectedly hawkish Bank of Japan hike, and yen intervention—are not currently set to happen simultaneously.
The logic driving the current yen weakness has shifted. Before 2024, the US-Japan real interest rate differential could explain the USD/JPY movement well. But since the ruling LDP lost the 2025 upper house election and Sanae Takaichi became leader, the market has questioned Japan's fiscal sustainability—stimulus programs pushed up JGB yields, but this upward move mainly reflects the ever-rising term premium of Japanese government bonds relative to US Treasuries, not a narrowing US-Japan yield gap. The 10-year JGB yield has neared 3%, prompting debate about pension fund capital repatriation, but most believe that if this process is gradual and well-flagged, it's unlikely to trigger a 2024-style crash.
Goldman Sachs G10 FX Strategy team has raised its 3/6/12-month USD/JPY forecasts to 162, 163, and 165 (from 160, 158, 155), citing "higher-for-longer US interest rates, low recession risks, Japan's fiscal concerns, and a very gradual BOJ hiking path all supporting continuing depreciation pressure on the yen."
CFTC positioning shows non-commercial speculator net short yen positions have neared July 2024 levels. The difference this time is that the market has already priced in yen weakness—whereas the July 2024 crash happened precisely because the market had not priced the possibility of a sudden yen rally before.
Japanese stock positions are even more crowded and concentrated than two years ago
On the macro side, the yen has tailwinds to remain weak, but on the equity side, fragility is quietly accumulating.
Quantitatively: TOPIX and Nikkei 225 are 37% and 53% higher than on July 11, 2024, respectively. Net foreign inflows since Liberation Day in April 2025 have reached 14.8 trillion yen, and net foreign positioning is more than 20% higher than before the July 2024 crash. Retail margin balances (margin buying) are 35% higher than in July 2024, near a five-year high. According to Goldman Sachs Prime Services, hedge funds' total/net allocation to Japan as a share of global portfolios are at the 99th/98th percentile over the past five years.
Structurally: This year's TOPIX gains are highly concentrated—many components remain below their 200-day moving averages, but the index has risen thanks to banks, steel & non-ferrous metals, electronics/precision instruments, and AI-related exporters. Nikkei/TOPIX ratio (NT ratio) expanded to a historical high of 18 times in June; the median valuation of AI-related stocks in TOPIX is now nearly double that of non-AI stocks. This is very similar to the structure before the July 2024 crash: an implicit long exporters and financials, short domestic defensives tilt in many portfolios.
If there is an unexpected shock, this structure means selling will transmit quickly and will be hard to hedge in time.
The real tail risk: AI narrative collapse or a geopolitical black swan
The probability of a yen-triggered flash crash is lower than in 2024. The bigger risk to be wary of comes from a different direction: any event that shakes the global AI growth narrative—like the DeepSeek-triggered selloff in Q1 2025—or a geopolitical shock big enough to shake the narrative of "robust US-led global economic growth", will put today's highly crowded AI positions in a similar spot to exporters' positions in 2024.
The crash two years ago was later labeled by many overseas investors as a "Japan-specific problem". But right now, the Japanese stock market bears the highly concentrated expression of the global AI theme, with foreign and retail positions at historic highs. If the narrative reverses, what is exported may not be just Japan's problem.
~~~~~~~~~~~~~~~~~~~~~~~~
The above excellent content comes from Wind Chaser Trading Desk.
For more detailed interpretations, including real-time commentary and on-the-ground research, please join [Wind Chaser Trading Desk ▪ Annual Membership]
Risk Warning and DisclaimerThe market has risks, investments must be cautious. This article does not constitute personal investment advice, nor does it take into account the investment objectives, financial situation, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at your own risk. ```