Treasury Secretary Scott Bessent's yen-supportive stance has persisted, and the currency's sustained appreciation is reviving the risk of a yen carry-trade unwind that could force selling of U.S. equities, echoing the August 2024 episode when the S&P 500 lost 3 percent.
A yen rally that Treasury Secretary Scott Bessent has publicly backed is emerging as the market's sharpest cross-asset risk, with strategists warning that a sustained advance could unwind the carry trades funding global risk positions and drag U.S. equities lower. Morgan Stanley strategists argue carry trades can withstand the yen's strength, pointing to a U.S. policy rate of 3.50-3.75 percent against roughly 1 percent in Japan that still favors borrowing yen to buy higher-yielding assets.
The direction is turning less favorable as the Bank of Japan normalizes policy, and the August 2024 episode showed how quickly pressure can spread. The TOPIX fell 12 percent in a single session and the S&P 500 lost 3 percent before markets recovered once forced selling eased.
For U.S. investors, the danger is forced deleveraging. Funds facing losses or higher margin requirements tend to sell their most liquid, profitable holdings first — AI semiconductor names, expensive software and crowded momentum trades — regardless of whether company fundamentals changed.
The yen's rally matters well beyond the currency market. For years investors borrowed cheaply in yen and put the proceeds into higher-yielding currencies and risk assets; when the yen rises sharply, those trades turn loss-making and force position reduction. Bessent's public backing, which appears to have persisted, gives the currency momentum that keeps the unwind scenario live.
The most exposed pockets combine strong fundamentals with high expectations and crowded ownership. AI semiconductors and memory producers — Nvidia, Broadcom, AMD, TSMC, Micron, SK Hynix and Samsung Electronics — are an obvious source of liquidity during forced selling. Memory stocks may be especially volatile because they pair structural AI demand with a historically cyclical industry. Expensive software such as Palantir and Snowflake is sensitive to rising volatility and shifting discount rates.
Japanese exporters face a separate squeeze. A stronger yen cuts the value of overseas earnings converted back into yen and weakens export competitiveness, hitting automakers Toyota and Honda, electronics maker Sony and semiconductor-equipment names Tokyo Electron and Advantest. Currency hedging and overseas production soften the blow, but sustained appreciation could still trigger earnings downgrades.
Small caps and rate-sensitive sectors round out the vulnerable list. The Russell 2000, with its weaker balance sheets and thinner liquidity, would suffer if a carry unwind tightened global financial conditions. REITs such as Equinix, Prologis and American Tower could face pressure if Japanese institutions repatriate money from overseas bonds as domestic yields become more attractive, keeping global long-term yields elevated.
A weaker dollar adds another layer. If yen strength develops into broader dollar weakness, non-U.S. investors see reduced returns on U.S. holdings even when the underlying shares rise. A 10 percent equity gain combined with a 5 percent dollar fall translates into roughly a 4.5 percent return in euro terms.
A falling dollar-yen rate alone does not confirm a broad unwind. The stronger warning would be yen appreciation accompanied by rising equity and currency volatility, a falling Australian dollar-yen cross, weak semiconductor breadth, wider credit spreads, foreign outflows from Asian markets and broad dollar weakness.
The August 2024 precedent cuts both ways. The TOPIX's 12 percent single-session drop and the S&P 500's 3 percent loss showed how fast a liquidity shock can spread, yet markets recovered quickly once forced selling eased — evidence that an unwind does not automatically become a fundamental downturn. For investors, the yen carry trade is less a signal to exit equities than a prompt to reassess leverage, concentration and currency exposure, with the greatest vulnerability where high valuations, crowded ownership and thin liquidity meet.
This article is for informational purposes only and does not constitute investment advice.
