AI selloff boosts safe-haven demand, Japanese bonds and yen both rise.

Tech stock selloff deepens, investors flock to traditional safe-haven assets including the yen, Japanese government bonds and US Treasuries. The yen extended its gains, rising to its strongest level in over a month. After trading in a narrow range against the dollar for several weeks, the yen broke out of its range over the past 24 hours and is now trading at levels last seen on September 18 the day the Bank of Japan raised rates. On Friday, the yen rose as much as 0.4% to 156.08 per dollar, after gaining 0.9% on Thursday. Asian stocks fell in tandem with US equities as investors continued to rotate out of tech stocks. Japan's benchmark 10-year government bond rallied, pushing yields down 10 basis points to 2.78%, while the 20-year yield fell 6 basis points; US Treasuries retained most of Thursday's gains. Japanese government bond yields fell across the entire curve on Friday. Why the yen has become a safe-haven asset again "This week's earnings from major US tech companies have cast doubt on the AI-led US growth narrative, so the yen is being favored over the dollar as a safe-haven asset," said Carol Kong, strategist at Commonwealth Bank of Australia. She added that if unwinding of tech stock positions intensifies, the dollar/yen could continue to move lower. This shift marks a turn for the currency in recent years, the yen has struggled to consistently benefit from its traditional safe-haven status. During periods of market stress, wide interest rate differentials and Japan's massive outflows of overseas investment have often outweighed demand for the yen. In addition, reports that BOJ officials favor keeping rates unchanged at this month's meeting have also dampened expectations for near-term tightening. The "American character" of the latest selloff may be changing this dynamic. "Dollar selling driven by the ebbing of 'American exceptionalism' is offsetting safe-haven dollar buying," said Tom Nakamura, head of fixed income and foreign exchange at AGF Investments Inc. He expects the yen could strengthen to 156 per dollar in the near term. Bond market: Bonds are behaving like bonds again "Bonds are behaving like bonds again," said Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo. "When risk assets are volatile, duration provides diversification, and investors can finally earn coupon income while they wait." Japanese government bond yields had risen to multi-decade highs earlier this month on concerns about inflation, fiscal spending and a global bond selloff, and have been retreating since. Friday's bond rally came even as data showed Japan's key inflation gauge rose above the BOJ's 2% target for the first time this year data that should have supported a widely expected December rate hike. Loo said that as the market shifts focus to growth risks and AI-related concerns, inflation data has taken a back seat. "The sharp decline in short- and medium-term rates today also suggests that if AI stock declines and European debt concerns trigger sustained financial market shocks, the market is pricing in a possible delay in BOJ rate hikes," said Ryutaro Kimura, senior bond strategist at BNP Paribas Asset Management. Analysis noted that as the yield curve continues to flatten, newly issued (on-the-run) Japanese government bonds can no longer find a 4% yield; demand for safe assets has outweighed the impact of CPI data. He also mentioned that dollar/yen is falling, with the 155 level already in sight. Crosses and options The yen's appeal is not limited to the dollar: it rose 0.3% against the Swiss franc and also gained 0.3% against the euro, as French fiscal concerns and elevated energy prices weighed on the euro. Options traders have also turned more optimistic on the yen, as reflected in the one-month dollar/yen risk reversal. The change indicates investors are increasingly positioning for near-term yen gains even as strategists continue to debate whether the recent strength is mainly driven by risk aversion or by emerging domestic Japanese flows. Next test: Two central banks next week The rally comes ahead of rate decisions by the Japanese and US central banks next week, which will provide another test for the yen. The market widely expects the BOJ to keep rates unchanged, while overnight index swap (OIS) pricing shows about a 67% probability of a rate hike by December. However, some analysts caution that the latest move does not necessarily mark the start of a sustained yen appreciation trend. "Given central bank meetings next week and the midterm elections after that, I don't currently think this will develop into a sustained yen appreciation trend," said Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Banking Corporation.