U.S. Risk & Japan Stock Moves: Yen Carry Trade Recaptures Attention

Core Viewpoint - The Bank of Japan (BOJ) is expected to hike rates soon, which could have significant implications for global equities and the yen carry trade [2][3][10]. Group 1: Bank of Japan and Interest Rates - The BOJ is likely to raise rates this month, which could lead to a stronger yen and increased inflation, necessitating further rate hikes [3]. - The potential rate hike from the BOJ is seen as a greater threat to the US equity market than domestic US policies due to its impact on US Treasury yields [10]. Group 2: Japanese Stocks and Currency Impact - Japanese stocks are benefiting from corporate reforms and are attractively valued, but there is a negative correlation between the yen and these stocks, suggesting investors may need currency hedges [4]. - The current market position is different from August 2024, with speculative traders now net long on the yen, reducing the likelihood of extreme volatility [5][6]. Group 3: Global Market Implications - There is approximately $1 trillion invested in the yen carry trade, which could face unwinding risks, potentially leading to a 10-20% correction in riskier assets like AI stocks [7][8]. - The narrowing interest rate differentials between the US and Japan could hurt the dollar and benefit international stocks [11]. Group 4: International Valuations - Chinese and emerging market stocks are still attractively valued, with optimism surrounding AI adoption and innovation in China [14]. - European stocks are undervalued compared to the US, with a discount of 30-35% across sectors, and earnings growth in the Eurozone is expected to accelerate next year [14].