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Behind the AI stock market bubble lies a weak yen
The tech stock boom, financed in large part by the yen carry trade, is at risk of collapse if the currency strengthens
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Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs.
The world might be dividing into rival camps and competing trade blocs, but international capital flows remain footloose and fancy free. In so doing, they pose a threat to what remains of stability in the real economy.
A good example of this growing potential for international contagion is the influence of the weak yen on global stock prices. The Japanese currency is expected to remain weak for the foreseeable future – despite recent official intervention in foreign exchange markets by Japan and the United States – so the risk of a bursting of the “bubble economy” is likely to intensify.
The role of the weak yen in enabling key stock markets to ride so high for so long is generally unappreciated. The boom in artificial intelligence (AI) stocks is certainly one factor, but leveraged, yen-financed speculation in stocks is another important but hidden one.
As Naomi Fink, chief global strategist at Amova Asset Management in Tokyo, put it in a recent analysis, the yen is “carrying the weight of the world’s risk tolerance”. The yen-funded carry trade – where investors borrow cheaply in yen to invest in higher-yielding assets – is supporting long-duration risk assets, Fink observed, suggesting that “the currency may remain undervalued until risk appetite, global liquidity conditions or Japanese capital flows begin to shift”.
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