Why a stronger Japanese currency could spell trouble for AI and technology stocks

For much of the past year, a weak Japanese yen has been a quiet tailwind for global risk assets. Investors borrowed yen at near-zero interest rates to fund purchases of higher-yielding assets elsewhere—a strategy known as the carry trade. This dynamic helped support liquidity in markets, including the U.S. technology sector, which relies heavily on cheap capital to justify lofty valuations.

The risk emerges when the yen strengthens sharply. A rapid appreciation forces carry traders to unwind positions, selling global stocks and bonds to buy back the yen. This deleveraging can compress liquidity precisely when high-valuation tech names are most vulnerable, as their future earnings are discounted at higher rates in a tighter environment. Historically, such unwinds have coincided with volatility spikes in equity indices.

What to watch is the pace of currency movement rather than the level itself. A gradual yen rise may be manageable, but a disorderly spike—often triggered by intervention or a surprise Bank of Japan policy shift—could amplify selling pressure across technology and AI-related equities. Investors should monitor yen volatility and Japanese wage data, which influence policy expectations, as leading indicators for broader risk sentiment.