Hedge funds are rebuilding short-yen positions, positioning for renewed currency weakness, on the back of comments by Prime Minister Sanae Takaichi, as Japan heads into a closely watched general election this weekend, according to a report by Bloomberg.
The dollar-yen pair moved back into focus this week, climbing toward the 156–157 range and touching a two-week high with Takaichi reiterating over the weekend that a weaker currency could support exporters.
The comments came ahead of the 8 February election, which she called to strengthen her mandate, with polls suggesting her party is on course for a standalone majority.
Market participants say a decisive victory could give the government greater scope to pursue fiscal stimulus, adding to Japan’s already elevated debt levels and reinforcing expectations of continued yen softness.
Options markets are reflecting the shift in sentiment. Demand for large USD/JPY call options, which benefit from further upside in the pair, has overtaken demand for comparable put options, according to DTCC data. The cost of hedging against yen strength relative to yen weakness over the next month has fallen to its lowest level in nearly two weeks, signalling growing appetite for upside exposure.
The yen had weakened steadily following Takaichi’s rise to leadership of the Liberal Democratic Party in October, reaching an 18-month low against the dollar in January. That move briefly reversed after a dollar-yen rate check by the Federal Reserve Bank of New York and subsequent comments from US President Donald Trump, but selling pressure resumed following renewed support for a strong-dollar policy from US officials and the nomination of Kevin Warsh as the next Federal Reserve chair.
More recently, Takaichi’s renewed emphasis on the benefits of a softer currency has added fresh momentum to bearish yen positioning.
By contrast, long-only and real-money investors are adopting a more defensive stance amid recent volatility.
