After more than two years of a consistent trend, a reversal has recently occurred, naturally stemming from the conclusion of the U.S. dollar interest rate hike cycle. At the beginning of 2024, the newly appointed Governor of the Bank of Japan, Kazuo Ueda, reversed the negative interest rate policy of his predecessor, Haruhiko Kuroda, and began to provide forward guidance on interest rate hikes to the market. However, the market seems skeptical and has chosen to oppose the Bank of Japan, resulting in the yen depreciating beyond 160 in the first half of this year. One interpretation behind this phenomenon is that the speculative market does not acknowledge the sustainability of Japan’s inflation and believes that once the U.S. enters a rate-cutting cycle, Japan will revert to its old deflationary ways. Another interpretation stems from a complex hedging demand within the yen carry trade, which is primarily centered around NVIDIA. In simple terms, Japanese semiconductor stocks, especially electronics, exhibit a strong correlation with Taiwanese semiconductors and NVIDIA’s stock prices, influenced by political and industrial shifts. For a considerable time, investing in Japanese semiconductor stocks has been an important channel to capture alpha returns in the AI sector. However, as we enter 2024, there is a noticeable trend of “narrowing” in U.S. stocks, with capital seeking refuge clustering around leading companies, particularly NVIDIA. This has led to a gradual decoupling of Japanese semiconductor stocks from NVIDIA, and to avoid losing potential future alpha returns by selling Japanese electronic stocks, many investors are seeking hedging opportunities, making the choice to sell yen and buy NVIDIA a favorable option. This viewpoint is drawn from an economist I greatly admire, Fu Peng, and those interested can read more about this logic in his public account.
