The U.S. stock market is currently witnessing an extraordinary surge, reaching new heights that appear to signal robust economic growth and prosperityOn 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 futureYet, a closer look reveals that the forces driving this surge are complex, and not without significant risksAmong 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 trendsHowever, 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 fundsThe goal was to boost Japan's financial markets by empowering individuals to participate in the capital marketsHowever, 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 marketThis 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 returnsAs 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 sustainableAs U.S. stock indices approach their historical peaks, the pace of the market’s ascent has begun to slow

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Investors, particularly Japanese capital moving through the NISA program, are beginning to notice these decelerating gainsThese investors, once enthusiastic about the robust performance of the U.S. market, are now becoming increasingly cautious as the momentum faltersThe optimism that fueled the market surge is beginning to shift into a more uncertain outlookThis 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 moneyFor example, using 10-times leverage means that an investor can control $100 worth of stock by only investing $10 of their own capitalWhile 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 slowsA minor downturn, even a 10% drop in stock prices, can wipe out the investor’s entire initial capitalFor those using even greater leverage, such as 50- or 100-times, the risks escalate exponentiallyA 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 scenarioJapan has historically maintained low interest rates, making borrowing cheapThis has incentivized investors to use yen-denominated loans to amplify their investments in foreign markets, notably in the U.S. stock marketWhile the strategy has worked well during times of market growth, it is fraught with peril during market corrections or periods of stagnationAs the market slows and leverage begins to unwind, the resulting panic selling can trigger significant market volatilityThis 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

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During past financial crises, the unwinding of leveraged investments has led to cascading sell-offs, exacerbating market declines and pushing prices into freefallAs the selling intensifies, the flood of shares flooding the market further exacerbates the supply-demand imbalance, causing prices to plummetThe 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 marketsThe 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 beyondWhile this has helped sustain the rally in equity prices, it has also led to inflated valuations in many global stock marketsThis bubble-like environment, fueled by cheap borrowing and high leverage, creates a façade of market resilience that rests on shaky groundWhen 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 effectAs 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 investorsThis fear-driven sell-off creates a vicious cycle where prices continue to fall, liquidity dries up, and valuations become increasingly distortedThe 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 worldFinancial 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

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