What Are Risk-On and Risk-Off? Reviewing Moves in the Yen, Stocks and Interest Rates Through Past Market Episodes

Risk-on and risk-off, terms frequently used in market news, do not refer to a specific indicator or system. They describe changes in market participants’ risk tolerance. The underlying factors can include the economy, financial concerns, geopolitics, fiscal policy and inflation, each of which influences movements in currencies, stocks, bonds, gold and crude oil.

During risk-on and risk-off periods, not only currencies but also stocks, bonds, gold and crude oil may move at the same time. One factor behind this is the adjustment of risk exposure across asset classes. As economic deterioration or financial concerns intensify, investors tend to reduce their holdings of high-yielding currencies and economically sensitive assets, creating a tendency for funds to flow into safe-haven assets such as the yen, dollar and government bonds.

Looking at representative examples from the past, risk-on conditions intensified in 2017 as the global economy improved, with a bias toward a weaker dollar and stronger yen, as well as rising stocks and gold. By contrast, concerns over the Chinese economy in 2015 led to a stronger yen and weaker dollar, falling stocks, government bond buying and periods in which gold rose as a safe-haven asset. After the 2008 Lehman shock and the 2011 Great East Japan Earthquake, as well as during the high-inflation and monetary-tightening environment of 2022, movements such as a weaker yen, stronger dollar, falling stocks and changes in government bond prices did not follow a simple, mechanical pattern.

These examples show the importance of identifying what caused the market stance to change, rather than relying on simple risk-on or risk-off conclusions, and comparing movements in the yen and dollar alongside those in stocks, bonds, gold and crude oil. Differences in the underlying factors can significantly alter how each market responds.