How the Yen Carry Trade Links the Nikkei to the Nasdaq 100

The Nikkei more than doubled in a little over a year, a rally fueled in large part by cheap money flowing out of Japan. The yen carry trade links the Nikkei to the Nasdaq 100 because the same low-cost Japanese funding that lifts Tokyo stocks also supports leveraged positions in U.S. technology names. When that leverage leaves, both markets sell off together, and the Nikkei's drop of more than 9% in a single session landed on the same day as the heaviest selling in U.S. stocks. The Nikkei now works as a live gauge of how much borrowed capital is still holding up global equity valuations.

James Stanley, StoneX Media Senior Market Analyst, covers price action and macroeconomics across equities, fixed income and currencies, with a focus on event-driven market moves. That coverage gives insight into how yen funding, the Nikkei and U.S. tech valuations are tied together through leverage.

Key Themes

• The Nikkei more than doubled in about 15 months, a rally built largely on cheap Japanese funding.
• The Nikkei's steepest one-day drop came alongside the heaviest selling in U.S. tech stocks.
• Dollar yen has held its structure even as the Nikkei broke through key support.

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Cheap Yen Funding Inflates Stock Valuations Far Beyond Japan

"What is it that creates these exuberant valuations? The first place is cheap capital," Stanley says, pointing to a global marketplace where low-cost funding is not isolated to the United States. Cheap yen funding spreads that effect well beyond Japan, carrying capital into whatever stocks investors can buy. Notably, the effect reaches companies with no direct exposure to artificial intelligence, with Walmart trading on a higher trailing price-to-earnings multiple than Nvidia.

Warren Buffett's Japan trade shows how cheap yen funding works in practice. Stanley describes it as "the most beautiful trade in the world", with Buffett selling bonds in Japanese yen and then buying Japanese banking stocks and trading houses. Funding in a cheap currency and buying assets in the same market let the position gain as the Nikkei rallied. Repeated across leveraged investors globally, the same structure helps explain why Japanese equities climbed far faster than the country's fundamentals alone would suggest.

Nikkei Selloff Exposes Leverage Built on Japan's Cheap Money

The Nikkei's heaviest one-day fall came the day after U.S. election results, not on the night the results arrived. According to Stanley, "It wasn't election results. It was the day after when this got really bloody." That timing points away from politics and toward leverage being pulled out of a market that had risen on borrowed money. Specifically, the Nikkei broke through a support zone it had been resting on, a sign the selling went beyond a routine pullback.

Japan's shrinking population makes the Nikkei's rally harder to explain through fundamentals. With Japan's population projected to fall by about a third, real GDP per capita needs to rise roughly 50% just to hold living standards steady, a high bar for the companies listed on the index. Conversely, a rally built on funding rather than growth leaves the Nikkei vulnerable whenever that funding becomes more expensive or harder to find. Stanley notes that the Nikkei's run "is indicative of the cheap money that has been flowing out of Japan".

Nasdaq 100 Tech Stocks Inherit the Risk of a Yen Carry Unwind

The Nasdaq 100 and the Nikkei saw their heaviest selling in the same session, showing how a yen carry trade unwind travels from Tokyo into U.S. technology stocks. Leverage that has built up in overbought artificial intelligence names, including Nvidia, is the same leverage that can leave when funding tightens. "I think the bigger issue is funding," Stanley argues, adding that "whether or not this becomes a bigger event is going to depend on whether or not we have a larger global deleveraging event". The speed of these episodes is evidenced by the July 2024 carry unwind, when the Nikkei fell by more than a quarter in a few weeks. For U.S. tech investors, the Nikkei is part of the Nasdaq 100 story rather than a separate market.

Yen Carry Trade Stress Surfaces in the Nikkei and Dollar Yen

Yen carry trade stress shows up in a handful of market signals, led by the Nikkei and the dollar yen exchange rate. The Nikkei shows how much leveraged capital is leaving Japanese equities, with breaks of support marking sharper exits. Dollar yen acts as a signpost for the carry trade itself, where an intact structure in the pair signals a contained unwind and a break would point to a more aggressive one. Daily oversold readings on the Nasdaq 100 and moves in 10-year Treasury yields show if capital is leaving U.S. tech for the safety of bonds.

 

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: James Stanley, StoneX Media Senior Market Analyst