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How Japan’s yen could be ripping through U.S. stocks


A man walks past an electronic quotation board displaying the exchange rate for the Japanese yen against the US dollar in Tokyo on August 2, 2024

Kazuhiro Nogi | Afp | Getty Images

The key driver of global markets is the yen exchange rate, according to one financial historian, who warned the trend should concern those “entirely focused on U.S. domestic dynamics in trying to assess price outcomes.”

Russell Napier, co-founder of the investment research portal ERIC, said in a recent installment of his “Solid Ground” macro strategy report that investors have been provided with a glimpse of the impact that a change in Japanese monetary policy can have on U.S. financial markets.

“That there is such a strong relationship between the structure of monetary policy in China and Japan and US assets prices will come as a huge shock for most US investors,” Napier said in a report published Tuesday.

“The narrative for the past few decades is that the US is, in economic and financial terms, an island largely un-impacted by such global trends.”

Stocks are experiencing a broad slump, with many market participants caught off guard by the speed of the yen’s rally.

The Japanese currency is up around 8% against the U.S. dollar over the last month, trading at 148.84 a dollar on Friday. It marks a stark contrast from the run-up to the July 4th U.S. holiday, when the yen fell to 161.96 per dollar for the first time since December 1986.

The Japanese national flag is seen at the Bank of Japan (BoJ) headquarters in Tokyo on July 31, 2024. The Bank of Japan lifted its main interest rate on July 31 for just the second time in 17 years in another step away from its massive monetary easing programme.

Kazuhiro Nogi | Afp | Getty Images

The rising yen has fueled speculation about whether this could mark the end of the popular so-called “carry trade” — wherein an investor borrows in a currency with low interest rates, such as the yen, and reinvests the proceeds in a currency with a higher rate of return.

“The now evident vulnerability of US equity prices to a rise in the Yen exchange rate warns of the consequences for US asset prices and developed-world asset prices in general from monetary policy changes in the east,” Napier said in the Tuesday report.

He cited the recent rally in the Japanese currency as an example where selling pressure from investors seeking to repay their yen debt had pushed prices of U.S. equities down, while yields on U.S. government debt continued to decline.

“That the US equity market should react so negatively to this rally in the Yen is the shape of things to come, and an indicator to investors of how inter-related US equity valuations are with the global monetary system,” Napier said.

‘An implosion of the carry trade’

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