The yen is becoming a more effective hedge against an artificial intelligence-driven market shock as changes in Japan’s policy backdrop reduce the risk of the currency weakening sharply when global yields rise, according to Goldman Sachs.

“The yen now looks like a more attractive hedge for procyclical portfolios than it has been over recent years, despite the global backdrop still arguing for further JPY weakness,” strategists including Kamakshya Trivedi wrote in a note dated Oct. 23.

The call comes after the yen showed renewed signs of its traditional haven characteristics during last week’s global tech stock rout. It surged 0.9% against the dollar Thursday and briefly reached its strongest level in more than a month Friday as concerns over the AI investment boom drove equities lower and sparked a sharp Treasury rally. The currency subsequently pared some of those gains as US yields stabilized.

Goldman argues that the AI boom has left both US equities and the dollar particularly exposed to a deterioration in the growth outlook. A shock that pushes stocks and bond yields lower at the same time would create the type of market environment that has historically been most favorable for the yen.

There are also early signs that the currency is becoming less vulnerable when global yields move higher, according to Goldman. Yen weakness in response to rising yields has been more limited recently than over the past six to seven years, which the strategists said likely reflects reduced depreciation pressure from Japan’s domestic policy settings.

That marks a contrast with 2022, when the Bank of Japan maintained yield-curve control as global borrowing costs surged. The changing relationship means the yen “should be a less painful hedge to hold, even if carry remains negative,” Goldman said.

A more constructive domestic policy backdrop, the yen’s cheap valuation and elevated risk of currency intervention are also helping limit the potential upside in dollar-yen, improving the asymmetry of holding the Japanese currency as a hedge.

In the near term, Goldman continues to favor selling the euro against the yen, saying there is little obvious domestic catalyst for significant yen appreciation and a high bar for the BOJ to surprise markets with a hawkish message at its Oct. 30 policy decision announcement.

Over a longer horizon, however, the strategists see the dollar-yen trade as the more effective protection against a deterioration in risk sentiment. “Short USD/JPY should be the most effective hedge against general growth wobbles or, specifically, a broad AI shock,” they wrote.