The U.S. stock market is currently witnessing an extraordinary surge, reaching new heights that appear to signal robust economic growth and prosperity. On the surface, it is easy to get swept up in the optimism, especially as the market hits records and investors feel a sense of confidence in the financial future. Yet, a closer look reveals that the forces driving this surge are complex, and not without significant risks. Among the key contributors to this growth is Japan's NISA program expansion, a move that has had profound implications on both local and global investment trends. However, lurking beneath this seemingly positive development are growing concerns over the stability of the markets, particularly given the rising use of high-leverage investments, especially by Japanese investors, in the U.S. stock market.

The Nippon Individual Savings Account (NISA) program was introduced by Japan as a means to encourage long-term savings and investments among its citizens, primarily in stocks and mutual funds. The goal was to boost Japan's financial markets by empowering individuals to participate in the capital markets. However, as Japan's domestic market has struggled with prolonged low interest rates and a lack of attractive local investment opportunities, the NISA program has been expanded in recent years, encouraging even greater outflows of capital into foreign markets, particularly the U.S. stock market. This shift has been driven by several factors: the relative maturity of the U.S. financial markets, the breadth and diversity of investment opportunities, and the potential for higher returns. As a result, U.S. stock markets have seen an influx of capital, contributing to the rally and pushing major indices to new heights.

While this capital influx has undeniably contributed to the surge in the U.S. stock market, there are signs that this growth is not sustainable. As U.S. stock indices approach their historical peaks, the pace of the market’s ascent has begun to slow. Investors, particularly Japanese capital moving through the NISA program, are beginning to notice these decelerating gains. These investors, once enthusiastic about the robust performance of the U.S. market, are now becoming increasingly cautious as the momentum falters. The optimism that fueled the market surge is beginning to shift into a more uncertain outlook. This uncertainty is compounded by a significant risk factor: the heavy reliance on high-leverage investment strategies, especially by Japanese investors using yen-denominated leverage to finance their U.S. stock purchases.

Leverage, in its simplest form, allows investors to control larger positions in the market using borrowed money. For example, using 10-times leverage means that an investor can control $100 worth of stock by only investing $10 of their own capital. While this can be an attractive strategy during periods of strong market performance, the risks are amplified when markets face volatility or when the market’s upward momentum slows. A minor downturn, even a 10% drop in stock prices, can wipe out the investor’s entire initial capital. For those using even greater leverage, such as 50- or 100-times, the risks escalate exponentially. A mere 1% or 2% decline in stock prices could trigger margin calls, forcing investors to quickly liquidate positions to cover their losses.

The use of high leverage, particularly by Japanese investors borrowing in yen, creates a dangerous scenario. Japan has historically maintained low interest rates, making borrowing cheap. This has incentivized investors to use yen-denominated loans to amplify their investments in foreign markets, notably in the U.S. stock market. While the strategy has worked well during times of market growth, it is fraught with peril during market corrections or periods of stagnation. As the market slows and leverage begins to unwind, the resulting panic selling can trigger significant market volatility. This phenomenon is not new; history has shown that during market downturns, particularly in the wake of the unwinding of high-leverage positions, the effects can be devastating. During past financial crises, the unwinding of leveraged investments has led to cascading sell-offs, exacerbating market declines and pushing prices into freefall. As the selling intensifies, the flood of shares flooding the market further exacerbates the supply-demand imbalance, causing prices to plummet. The U.S. market’s position as a global economic leader means that such a downturn could trigger financial tremors across the globe, sending shockwaves through international markets and potentially plunging the global economy into a recession.

Adding another layer of complexity to the situation is the widespread use of low-interest yen-denominated borrowing across global markets. The practice has subtly infiltrated various international equity markets, with investors borrowing cheap yen to invest in markets such as those in the U.S., Europe, and beyond. While this has helped sustain the rally in equity prices, it has also led to inflated valuations in many global stock markets. This bubble-like environment, fueled by cheap borrowing and high leverage, creates a façade of market resilience that rests on shaky ground. When market conditions change or sentiment shifts, the risks inherent in this system become glaringly apparent.

When the market starts to show signs of weakness, the collective fear among investors can trigger a cascade effect. As asset prices begin to drop, those holding leveraged positions are forced to sell off their assets to cover their debts, exacerbating the downturn and amplifying the fear among other investors. This fear-driven sell-off creates a vicious cycle where prices continue to fall, liquidity dries up, and valuations become increasingly distorted. The interconnectedness of global financial markets means that a crisis in one region, such as the U.S. market, can ripple through other markets, affecting economies across the world. Financial institutions, which are also heavily invested in these markets, may find themselves caught in the turmoil, increasing the risk of systemic instability.

In light of these dynamics, it is crucial for investors to recognize the dangers of high-leverage investing, especially in the context of foreign markets and low-interest borrowing. The allure of high returns must be weighed against the inherent risks of market volatility and potential loss of capital. Risk management strategies become essential in such an environment, and investors must carefully assess their risk tolerance and invest accordingly. The need for tighter regulation of high-leverage investments has never been more apparent. Financial authorities must take a proactive role in monitoring and controlling the use of leverage in the markets to mitigate systemic risk and prevent another financial crisis.

The current market surge in the U.S., driven by Japanese capital flowing through the NISA program and amplified by high-leverage investments, presents both opportunities and risks. While the market may appear to be on an upward trajectory, the risks associated with high leverage, particularly in the context of foreign borrowing, cannot be ignored. As history has shown, market corrections often come quickly, and when they do, the consequences of excessive leverage can be catastrophic. Investors must tread carefully, balancing the potential for gains with the understanding that market conditions can change rapidly, and the costs of misjudging those changes can be devastating. The current market environment serves as a reminder that what appears to be a period of prosperity may, in fact, be a precarious situation waiting to unravel. Regulatory bodies must also remain vigilant, ensuring that financial markets remain stable and that investors are shielded from the excesses of high-leverage speculation.