Goldman Sachs Considers Yen a More Reliable Hedge Against AI Shock

Goldman Sachs concluded that the Japanese yen is acquiring the properties of a more reliable hedging instrument against market shocks caused by the artificial intelligence boom. According to the bank, changes in Japan's domestic policy reduce the likelihood of a sharp weakening of the currency amid rising global yields.

Goldman Sachs strategists, including Kamakshya Trivedi, noted this in a memo dated October 23. They pointed out that the yen now looks like a more attractive hedge for procyclical portfolios than in previous years, although the overall backdrop still supports further weakening of the currency.

The bank's conclusion followed after the yen showed signs of a traditional safe-haven currency last week amid a sell-off in technology stocks. On Thursday the rate rose 0.9 percent against the dollar, and on Friday it briefly reached a more than one-month high due to concerns over AI investments that pressured stocks and triggered a rise in Treasury yields. The yen later partially reversed its gains as U.S. yields stabilized.

According to Goldman Sachs, the AI boom has made U.S. stocks and the dollar particularly vulnerable to deteriorating growth prospects. A shock that simultaneously lowers stocks and bond yields has historically created the most favorable conditions for the yen. In addition, the yen's weakening in response to rising yields has recently been more limited than in the previous six to seven years, likely reflecting reduced pressure from Japan's domestic policy.

In the short term, the bank still recommends selling the dollar against the yen, as there are no clear domestic catalysts for significant yen strengthening, and the Bank of Japan has a high bar for unexpected tightening at its October 30 meeting. In the longer term, a short position in the dollar/yen pair could become the most effective protection against growth disruptions or a broad AI shock.