The question on every investor's mind is whether Japanese stocks will experience a replay of the August 2024 market crash.

The global financial community has not forgotten the brutal sell-off from two years ago. Between July and August 2024, the TOPIX index plunged 24% from its historic peak. The trigger was a rapid strengthening of the yen, with the dollar-yen pair dropping from 162 yen to 143 yen in under a month. This was compounded by the Bank of Japan's unexpected rate hike and a shockingly weak US non-farm payrolls report. These multiple negative factors converged, sending a market heavily overweight in export-oriented and financial stocks into a tailspin. Now, with the yen weakening once more, those fears are resurfacing.

According to a trading desk, Goldman Sachs' Japan equity strategy team, led by analyst Bruce Kirk, points out that the macroeconomic backdrop for the yen today is fundamentally different from two years ago, making the conditions for a rapid yen appreciation much weaker. However, the stock market's positioning is far more crowded. Foreign net buying, hedge fund allocations, and retail margin debt levels have all exceeded or are significantly higher than they were in July 2024. While the probability of a yen-driven flash crash has decreased, the vulnerability of the Japanese stock market to a sudden shock from AI narrative shifts or geopolitical events is actually higher than it was two years ago.

The core of this analysis lies in the speed of change, not the starting or ending point of the exchange rate. Between January and March 2025, the dollar-yen pair gradually declined from 158 to 147, yet the TOPIX actually rose 5% during the same period. The 2024 crash was triggered by the yen's rapid 11% appreciation in just three weeks. Currently, the market is pricing in very little risk of a sudden yen strengthening. The one-month implied volatility for the dollar-yen is relatively low, meaning if a surprise move does occur, the impact will be far greater.

The Real Mechanism of the 2024 Crash: Not Just the Exchange Rate, but a Chain Reaction of Stop-Losses

The internal logic of that crash is far more complex than the simple explanation of a "yen appreciation hurting export profits."

In the first phase (July 11 to end of month), a lower-than-expected US CPI and yen intervention initially dragged down export-related sectors. The TOPIX bank index barely moved during this period, even rising 5% on the day of the Bank of Japan's rate hike on July 31st.

The second phase, from July 31st to August 5th, was the true massacre. The BoJ's rate hike was more hawkish than anticipated. Then, on August 2nd, the US jobs data collapsed. Two independent negative narratives converged within 48 hours. Bank stocks plummeted 27% from their post-rate-hike peak to the August 5th low. The market's implicit bias – long on exporters and financials, short on domestic defensive stocks – was completely reversed and crushed.

Multi-strategy hedge funds typically have drawdown limits of around -2.5% of total deployed capital. In that environment, a market-neutral portfolio with a 5-percentage-point sector bias, even with a seemingly low net exposure, could suffer a peak-to-trough loss of -5%, easily triggering stop-loss lines. The cascade was clear: stop-losses triggered → forced position liquidation → long-only funds forced to sell → risk parity and CTA funds sensing a momentum reversal joining the selling spree, creating a complete negative feedback loop.

Ultimately, after the single-day plunge on August 5th, the TOPIX rebounded 23% from its low to September 3rd. The speed of the rebound itself is telling: this was more of a stop-loss-driven liquidity crisis than a re-pricing of Japanese equities' fundamentals.

The Logic for a Weaker Yen is More Solid Than in 2024

The "perfect storm" that caused the yen to suddenly reverse course two years ago – expectations of a surprise Fed rate cut, a hawkish surprise from the BoJ, and yen intervention – does not currently have the conditions to occur simultaneously.

The logic driving the current yen weakness has shifted. Before 2024, the real interest rate differential between the US and Japan was a strong predictor of the dollar-yen exchange rate. However, since the LDP's defeat in the Upper House election in the second half of 2025 and the rise of the Takaichi administration, the market has begun to question Japan's fiscal sustainability. The economic stimulus package has pushed up JGB yields, but this increase primarily reflects a widening of the Japanese bond term premium relative to the US, not a narrowing of the Japan-US yield spread. The 10-year JGB yield is approaching 3%, which has sparked discussions about a potential repatriation of Japanese pension assets. However, the mainstream view is that if this process is gradual and well-communicated, it is unlikely to trigger a 2024-style crash.

Goldman Sachs' G10 FX strategy team has revised its 3-month, 6-month, and 12-month dollar-yen forecasts to 162, 163, and 165 respectively (up from 160, 158, and 155). The rationale is that "higher-for-longer US rates, low recession risk, Japan's fiscal concerns, and the BoJ's very gradual rate hike path all support a sustained weakening pressure on the yen."

From CFTC positioning data, the net short yen positions of non-commercial speculators are now close to the levels seen in July 2024. But the key difference this time is that the market has already priced in a weak yen. In July 2024, the crash happened precisely because the market had not priced in a sudden yen strengthening at all.

Japanese Stock Market Positioning is More Crowded Than Two Years Ago, and More Concentrated

While the macro environment favors a weaker yen, the fragility in the stock market is quietly building.

In terms of quantity, the TOPIX and Nikkei 225 are 37% and 53% higher than their levels on July 11, 2024, respectively. Foreign net buying since the Liberation Day in April 2025 has totaled approximately 15 trillion yen, with current net foreign positions over 20% higher than before the July 2024 crash. Retail margin debt (margin buying balance) is 35% higher than in July 2024, approaching a five-year high. Goldman Sachs' prime services data shows that hedge funds' total/net allocation to Japan as a percentage of their global portfolio is at the 99th and 98th percentile of the past five years, respectively.

Structurally, the TOPIX's gains this year are highly concentrated. Many constituent stocks are still trading below their 200-day moving averages, but the index is being propelled higher by banks, steel and non-ferrous metals, electronics/precision instruments, and AI-related exporters. The Nikkei/TOPIX ratio (NT ratio) expanded to 18 times in June, a historical high. The median valuation of AI-related stocks in the TOPIX is nearly double that of non-AI stocks. This is strikingly similar to the structure just before the July 2024 crash: a market-wide implicit bias of being long on exporters and financials and short on domestic defensive stocks.

In the event of an unexpected shock, this structure means selling would be transmitted quickly and would be very difficult to hedge against in time.

The Real Tail Risk: The Collapse of the AI Narrative or a Geopolitical Black Swan

The probability of a yen-triggered flash crash is lower than in 2024. The more significant risk to watch for comes from a different direction. Any event that shakes the global AI growth narrative – similar to the DeepSeek-induced sell-off in the first quarter of 2025 – or a geopolitical shock that undermines the "US-led, stable global economic growth" narrative, would expose the current highly crowded AI-related positions to the exact same predicament as the export sector positions in 2024.

Two years ago, the crash was retrospectively labeled by many overseas investors as a "Japan-specific problem." But today, the Japanese stock market is a concentrated expression of the global AI theme. Foreign and retail positions are at historic highs. If the narrative reverses, the exodus would not be just a Japanese problem.