Hedge funds and other currency traders face heightened volatility in the yen this week as Japan’s three-day market holiday reduces liquidity just as investors reassess the outlook for Bank of Japan interest-rate increases and the possibility of further government intervention, according to a report by Bloomberg.
The yen was trading around JPY156.85 to the dollar on Monday after losing about 2% last week. Japanese markets are closed Monday to Wednesday for the Silver Week holiday, leaving thinner trading conditions at a time when investors are alert to signs that authorities could intervene to support the currency.
The Bank of Japan raised its policy rate to 1.25% on Friday, its highest level in more than three decades, but the move failed to generate a sustained yen rally. Two policymakers opposed the increase, while Governor Kazuo Ueda offered limited guidance on the timing and pace of additional tightening.
The yen initially came under renewed pressure following the decision, although reports that Japanese officials had conducted a so-called rate check subsequently reinforced speculation that authorities remain prepared to act in the foreign-exchange market.
For hedge funds running yen positions, the combination of reduced liquidity and intervention risk could make moves in the currency more abrupt. Japan has already demonstrated its willingness to use the market to support the yen, while US and Japanese authorities jointly intervened earlier this year.
The currency had strengthened during the first part of September as traders increased expectations for faster BOJ tightening and unwound some yen-funded carry trades. That rally has since reversed, putting renewed attention on whether the central bank can deliver enough policy tightening to narrow the interest-rate gap with the US.
Positioning data highlights the potential for crowded trades. Speculators increased their net long-yen exposure to $9.7bn in the week to 15 September, the highest level since July 2025, according to US regulatory data. The build-up in bullish positions occurred just before the BOJ meeting and leaves traders exposed if the yen resumes its decline.
The Federal Reserve’s own policy stance is another factor for yen traders. The Fed has signalled further tightening, raising the prospect that US rates could continue to move higher even as the BOJ proceeds cautiously. That relative policy outlook has helped maintain pressure on the Japanese currency.
The yen had reached roughly JPY164 to the dollar in July, its weakest level in four decades, before coordinated intervention helped drive a substantial recovery. Japan subsequently spent a record JPY15.4tn on intervention in the month through August 26, according to Finance Ministry data.
