Goldman Sachs has identified a stronger Japanese yen as a potential hedge against a cooling artificial-intelligence investment cycle, arguing that a weaker U.S. growth outlook could narrow the interest-rate advantage that has supported the dollar and push USD/JPY lower.
The framework centers on a reversal in the forces that have kept the yen under pressure: wide U.S.-Japan yield differentials, carry-trade demand and persistent Japanese capital outflows. If spending on AI infrastructure slows sharply enough to weaken U.S. growth and lower expected Federal Reserve rates, Japanese institutions could have greater reason to bring capital home while dollar support fades.
Goldman Sachs’ exchange-rate model, known as GSDEER, estimates that the yen is undervalued by roughly 40% against the dollar, the largest undervaluation among the currencies covered by the framework. Valuation alone has rarely been enough to move USD/JPY, but it creates room for a pronounced adjustment if rates and capital flows begin shifting in the same direction.
USD/JPY was trading near 157 in the market conditions described in the report, leaving the yen close to levels that have repeatedly drawn attention from Japanese policymakers concerned about currency weakness and higher import costs.
Technology selling raises questions over AI spending
Goldman Sachs pointed to signs of stress in technology positioning as a possible early warning for the dollar-yen trade. According to the bank’s positioning data, global information-technology stocks recorded their largest two-week net selling in more than a decade, a move measured at 3.3 standard deviations from the historical norm.
Hedge-fund short leverage also approached the 99th percentile of its five-year range, Goldman Sachs said. That combination suggests that some market participants have moved quickly from crowded enthusiasm around AI-linked shares toward defensive positioning.
A reduction in AI spending would matter beyond equity valuations. The sector has become increasingly tied to U.S. growth expectations through large commitments to data centers, computing capacity, power generation and semiconductor supply chains. Slower spending plans could reduce forecasts for corporate investment and weaken the case for U.S. rates to remain substantially above those in Japan.
Goldman Sachs’ recent correlation data showed those links becoming more visible in mid-October. Since Oct. 14, the correlation between an AI leaders basket and the S&P 500 rose to 0.91 from 0.73, while the basket’s relationship with changes in the 10-year Treasury yield turned positive, reaching 0.19 from negative 0.13.
The same basket’s correlation with USD/JPY rose to positive 0.46 from negative 0.34. In practical terms, AI equities, Treasury yields and the dollar-yen exchange rate have recently moved more closely together than they did earlier in the month. Goldman Sachs cautioned that the pattern remains early-stage and could reverse.
Credit markets carry the larger financing risk
The scale of AI-related infrastructure funding has shifted attention beyond technology stocks and into credit markets. Goldman Sachs estimated that U.S. dollar-denominated project-finance issuance totaled about $1.05 trillion in 2026 as of Oct. 13, with most of that activity tied to data centers and computing infrastructure.
That level is roughly four times the historical pre-boom peak, according to the bank. Project finance typically depends on expected long-term cash flows from an asset, making the structure sensitive to changes in borrowing costs, power prices and assumptions about future demand for computing services.
A reassessment of those assumptions could affect the dollar through several channels. Reduced capital expenditure would weaken the investment component of U.S. growth. Lower growth expectations could pull Treasury yields down. A smaller U.S.-Japan yield gap would then make yen-funded carry trades less attractive, particularly if the Bank of Japan continues gradually lifting domestic borrowing costs.
The Bank of Japan has been moving away from its long era of ultra-low interest rates, while Japanese core consumer inflation was reported at 2.1% in the material supplied. Japanese policymakers have also signaled an interest in encouraging more domestic investment, adding a policy dimension to the prospect of capital remaining in, or returning to, Japan.
Low options volatility shapes the hedge
Goldman Sachs also highlighted relatively low implied volatility in USD/JPY options. Two-year at-the-money implied volatility stood around 9.9, below its 20-year average of 13.8 and close to a historical low of 8.4.
Lower implied volatility generally means options premiums are cheaper than they would be in a more turbulent currency market. That can make structures designed to benefit from yen appreciation less costly, although low volatility can persist and option buyers still face losses if USD/JPY remains stable or rises.
The bank’s preferred scenario therefore depends less on a mechanical valuation correction than on a change in the macroeconomic conditions behind the exchange rate. A cooling AI capital-spending cycle, softer U.S. growth expectations and a narrowing yield spread would all reinforce yen strength. Without those changes, the yen’s measured undervaluation may remain largely theoretical.
Energy shocks could complicate the yen outlook
The proposed hedge is not insulated from geopolitical risks. Goldman Sachs estimated in a commodity scenario that Brent crude could exceed $140 per barrel if severe disruptions hit supply from the Gulf region. The material also cited Brent trading above $112 after drone attacks on shipping vessels in the Middle East.
Higher oil prices could complicate a straightforward yen rally. Japan remains a major energy importer, so a sustained rise in crude costs can worsen its trade balance and increase imported inflation. At the same time, an energy shock can lift global bond yields even as equities fall, weakening the usual assumption that a stock-market sell-off will automatically support the yen.
Goldman Sachs noted that U.S. Treasuries continued to attract flows despite renewed geopolitical tension, suggesting that markets were weighing immediate safety demand alongside longer-term questions about growth and AI-related capital expenditure. The result is a currency setup where the yen could benefit from an AI-led slowdown, but where the path would be heavily influenced by energy prices and the response of global bond markets.
For deeper macro insight into yen dynamics and AI-driven markets, explore our Japan’s pivot outlook analysis next.
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