Goldman Sachs suggests shorting USD/JPY as a hedge against AI bubble risks.

Source: Jin10 Data

If signs of an AI bubble bursting emerge, hedging tools worth watching may not only be found in the Nasdaq options market but could also be hidden in the yen exchange rate.

For decades, Japan’s accumulated savings have flowed steadily overseas, particularly into U.S. bonds and stocks, providing vital funding for the prosperity of American asset markets. However, if investors begin to lower their expectations for U.S. economic growth, this massive capital flow could reverse, increasing pressure for Japanese funds to return home.

Jonathon Chryssafis of Goldman Sachs’ Fixed Income, Currencies, and Commodities (FICC) division is analyzing the connections between the AI investment cycle, U.S. interest rates, and Japanese capital flows. The resulting cross-asset trading logic points in one direction: the yen may strengthen.

For forex traders, this offers an alternative positioning strategy distinct from directly shorting tech stocks. As the cost of hedging tech stocks fluctuates, shorting USD/JPY may become a compelling option to explore. This logic is not only based on the yen being undervalued, but also on the possibility that some of the previous forces supporting the dollar may weaken as U.S. growth prospects evolve.

As of the time of this article, the yen has extended its rally to its strongest level in over a month, as selling pressure on tech stocks has driven investors toward traditional safe-haven assets, including the Japanese yen, Japanese government bonds, and U.S. Treasuries.

The environment for AI-related assets is changing. According to Goldman Sachs, based on observations from its prime brokerage business, global information technology stocks recently experienced their largest two-week net sell-off in over a decade, with a volatility level of 3.3 standard deviations. Meanwhile, hedge fund short leverage levels have approached the 99th percentile of the five-year historical distribution.

Beyond pressure on the stock market, the AI funding chain is also coming under increased scrutiny.

Goldman Sachs credit strategists are becoming increasingly cautious about investment-grade tech corporate debt and warn of potential significant divergence among AI infrastructure financiers in the high-yield bond market.

The scale of financing reflects the magnitude of this investment boom. According to Goldman Sachs data, as of October 13, 2026, the amount raised through U.S. dollar-denominated project issuances in 2026 has reached approximately $105 billion, with the vast majority allocated to data centers and computing infrastructure. This scale is about four times the previous historical peak issuance level before the AI boom.

The issue is that contracted demand for computing power does not necessarily mean the relevant companies have the financial capacity to deliver that computing power.

As financing costs and energy expenses rise, investors are becoming more selective. Projects that rely on a small number of customers or make optimistic assumptions about future equipment utilization are facing stricter scrutiny.

Geopolitical risks have added further complexity to this situation. Even as renewed escalation in the Middle East could push oil prices higher, the U.S. Treasury market continues to attract buying interest.

Goldman Sachs’ commodities team believes that in the event of a severe supply disruption in the Gulf region, Brent crude oil prices could surpass $140 per barrel. This means the threat of inflation has not disappeared.

But Krisafis noted that U.S. Treasuries continue to receive inflows, which may indicate that investors are placing greater emphasis on the long-term growth implications of reassessed AI spending prospects than on the latest geopolitical developments.

This difference is crucial. If AI investment growth slows, future corporate borrowing demand may decline, and competition among companies for capital could ease, ultimately reducing the yield advantage that has previously supported the dollar.

This adjustment may further impact the Japanese yen.

For a long time, Japanese investors have allocated a significant portion of their savings to overseas assets, particularly U.S. bonds and stocks. These capital flows have not only provided a substantial source of funding for U.S. financial markets but have also helped support the U.S. dollar to some extent.

Goldman Sachs' analysis suggests that if the investment outlook for AI significantly deteriorates, the assumptions supporting continued flows of capital into the U.S. could also be undermined.

If U.S. economic growth expectations weaken and the U.S.-Japan interest rate differential narrows, the appeal for Japanese investors to maintain their large exposure to overseas assets may decline. At that point, the likelihood of capital flowing back to Japan could increase, providing support for the yen.

From a valuation perspective, the Japanese yen also has significant potential for recovery.

Goldman Sachs' Global Economics-Driven Exchange Rate Valuation Model (GSDEER) estimates that the Japanese yen is undervalued by approximately 40% against the U.S. dollar. According to the model’s valuation range, the yen is the most undervalued currency, particularly cheap relative to the dollar.

However, a low valuation does not mean the exchange rate is about to reverse. Over the past few years, the yen has repeatedly demonstrated that even if an asset appears extremely cheap, its price can still decline further as long as factors such as interest rate differentials, carry trade demand, and capital outflows remain unfavorable.

Therefore, the focus of this trade is not simply betting that the yen is undervalued, but rather on whether the forces driving the USD/JPY higher may reverse.

Japan’s policy environment also provides partial support for this logic. Japanese authorities continue to express interest in a stronger yen; Hayami Naonobu encourages increased domestic investment; and the Bank of Japan remains on a path of gradual monetary tightening.

Meanwhile, if AI-related risks prompt the market to lower its expectations for U.S. economic growth, U.S. Treasury yields may come under downward pressure, narrowing the U.S.-Japan yield spread. The yield advantage that previously encouraged investors to buy the U.S. dollar and sell the Japanese yen could therefore weaken.

This constitutes the key transmission mechanism of concern to Goldman Sachs: the cooling of AI investment affects U.S. growth and financing demand, which in turn alters interest rate expectations and cross-border capital allocation, ultimately transmitting to the USD/JPY exchange rate.

The pricing in the options market is also worth noting. Goldman Sachs points out that the two-year at-the-money implied volatility for USD/JPY is currently around 9.9, significantly below the 20-year average of 13.8 and relatively close to the historical low of 8.4.

Lower implied volatility indicates that the market is pricing in relatively modest future fluctuations in the exchange rate. Goldman Sachs believes this makes buying USD/JPY put options an attractive hedging strategy.

Put options allow investors to profit from a decline in the USD/JPY exchange rate while limiting their maximum loss, under normal circumstances, to the premium paid. For traders seeking to express a directional view directly, shorting the USD/JPY spot pair is also an option, but the risk profiles differ: shorting spot currency involves financing costs and may expose traders to larger losses if the exchange rate moves against them.

Recent cross-asset correlation data also shows signs that the link between AI trading and the foreign exchange market may be strengthening.

Since October 14, Goldman Sachs' AI-led enterprise portfolio has shown significantly increased sensitivity to the broader stock market, U.S. Treasury yields, and the USD/JPY exchange rate.

The correlation coefficient between this portfolio and the S&P 500 Index has increased from 0.73 to 0.91; the correlation coefficient with changes in the 10-year U.S. Treasury yield has shifted from -0.13 to 0.19.

More notably, the correlation coefficient between this AI portfolio and the USD/JPY exchange rate has shifted from -0.34 to +0.46.

These changes indicate that the correlation between AI-related stocks and exchange rates is shifting. If this relationship persists, weaker AI stocks, declining U.S. Treasury yields, and a stronger yen against the dollar may occur simultaneously, creating a market environment favorable for shorting USD/JPY.

However, these changes are still in early stages, and short-term correlations may reverse quickly and should not be viewed as stable trading patterns.

The energy market is a significant variable. If energy supply is disrupted again, inflation expectations and U.S. Treasury yields may still rise even if stock markets decline, making the aforementioned transmission mechanism more complex.

Japan’s dependence on imported energy is another factor investors cannot ignore. Therefore, not every global risk-off rally should be viewed as a guaranteed signal of yen appreciation. A sharp rise in oil prices could intensify market concerns about economic growth, while also increasing inflationary pressures, thereby influencing interest rates and exchange rate movements.

For investors seeking to hedge against AI-related risks, the Japanese yen offers an alternative trading path distinct from directly shorting technology stocks. The yen-denominated put option strategy proposed by Goldman Sachs, along with directional shorting approaches, warrants further evaluation in light of interest rate differentials, capital flows, and volatility pricing.

As Wall Street watches the next phase of AI trading, the answer may not only be written in the valuations of Silicon Valley’s tech stocks, but also in the capital flows from Tokyo.