Japan’s policy shift appears to be making the yen less likely to slump when global yields climb, according to Goldman Sachs. The bank now sees the currency as an effective protection against an artificial intelligence (AI) market shock.

The note landed after a tech selloff pulled Japan’s Nikkei 225 well below its record. Chip and AI-linked shares led last week’s losses in Tokyo.

Tokyo Takes the AI Hit as the Yen Finds Buyers

The index closed at 62,693.16 on October 23, Nikkei data show. That leaves it about 14% below its record close of 73,007.

On October 22, the Nikkei fell 2.65% from the previous close to its lowest finish since July 30. The Tokyo Stock Price Index (TOPIX) lost 1.14% that day. Overall, the index has lost 5.2% in the past month.

Nikkei 225 Daily Chart Showing the October AI Selloff. Source: Google Finance

The yen rose 0.9% against the dollar on October 22 as Treasury yields dropped, Bloomberg reported. On October 23, it touched its strongest level in more than a month.

“The yen now looks like a more attractive hedge for procyclical portfolios than it has been over recent years, despite the global backdrop still arguing for further JPY weakness,” the strategists wrote.

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Why Goldman Says the Yen Stings Less to Hold

Goldman’s strategists argue the AI boom has left US stocks and the dollar exposed if growth weakens. Stocks and bond yields falling together is the setup Goldman says has historically favored the yen.

The bank ties the yen’s smaller reaction to rising yields to Japan’s domestic policy settings. Over a longer horizon, the strategists named one trade.

“Short USD/JPY should be the most effective hedge against general growth wobbles or, specifically, a broad AI shock,” they said.

In the near term, however, Goldman still sees the global backdrop favoring further yen weakness. It prefers selling the euro against the yen for now.

December rate decisions will test the bank’s view. In a Bloomberg survey, 83% of economists expect the Bank of Japan (BOJ) to hike from 1.25% that month. The Federal Reserve (Fed) is also expected to hike in December.

Matching quarter-point moves would leave the US-Japan rate gap little changed. The yen’s response to rising US yields would then show whether its weakness has truly eased.

For investors heavy in US tech, this week’s Fed and BOJ decisions offer an early test of that hedge.

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