LONDON/SINGAPORE/TOKYO – Just six weeks after hitting a four-decade low against the dollar, the tide appears to be turning for the battered yen as a host of factors finally smoke out brash traders who had spent years betting against the Japanese currency. While central bank rate hikes and record currency intervention have failed to provide lasting support for the yen, new tailwinds from capital repatriation, unwinding carry trades and U.S. political pressure are now giving short speculators cause to rethink their long-term game. To be sure, a 50 bp hike by the BOJ in September is still seen as extremely unlikely, particularly under BOJ Gov.
Kazuo Ueda’s cautious leadership. All the same, the shift in mood is backed up by money flows. Data from Citigroup indicate positioning on yen has flipped from bearish to bullish since the start of August, with interbank flow data showing leveraged funds, banks and real-money investors all net buying yen this week.
The convergence of central bank policy, investment flows, and speculative positioning is adding to volatility. The yen is set for a 2.3% surge against the greenback this week, the most since a rare joint U.S. and Japan intervention at the end of July to lift the yen. Stephen Jen, CEO and co-CIO of Eurizon SLJ Asset Management, said the risk of a rapid unwind of yen-based carry trades is rising similar to what was seen in 1998 when the collapse of Long-Term Capital Management forced banks and hedge funds to rapidly deleverage.
The tectonic plates are grating on each other with great forces.” The yen’s yearslong weakening trend accelerated this year as fiscal concerns mounted around stimulus plans by Prime Minister Sanae Takaichi and a strong belief that the BOJ was “behind the curve” in tightening monetary policy. Tokyo unleashed record solo intervention in April-May when the yen weakened beyond the ¥160 per dollar line. But a key moment for the currency came in July-August when Tokyo was joined by Washington in a rare bout of coordinated action after the currency weakened to ¥163.99, a level not seen since 1986.
Treasury Secretary Scott Bessent has long believed rate hikes were the right medicine for the weak yen, and he pressed the BOJ during a meeting of Group of 20 finance chiefs this week. That was followed by a speech by BOJ board member Hajime Takata, the sole dissenter to a July decision to keep rates steady, who raised the specter of 50 bps moves or hikes in quicker succession. The figures show a 27% chance of a rate increase in October and 56% odds in December.
Meanwhile, there are signs a sudden lurch higher in Japanese government bond yields to historic levels is compelling domestic institutional investors to repatriate money. Global markets shuddered in July when Japan floated the possibility of a pivot by its $1.8 trillion Government Pension Investment Fund back into domestic assets. Official data shows Japanese investors are shedding foreign bonds at the fastest pace in four years.
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