Japanese authorities may be trying to prop up the yen, but for currency traders the resulting rallies are creating opportunities to rebuild bearish positions in the currency, according to a report by Bloomberg.
The yen has given back much of the gains generated by the latest coordinated US-Japan intervention, returning to around JPY160 per dollar less than two weeks after the operation. With Japan’s interest rates still well below those in most other developed markets, investors continue to see the yen as an attractive funding currency for carry trades.
The strategy involves borrowing yen at relatively low interest rates and using the proceeds to invest in higher-yielding currencies and assets. When official intervention temporarily strengthens the Japanese currency, traders can use the stronger yen as an opportunity to re-establish short positions.
Hedge funds had reduced their bearish yen exposure sharply following the intervention, cutting short bets by roughly half through 4 August. But market participants including JPMorgan Private Bank and State Street Bank & Trust say some investors are already returning to yen-funded carry strategies.
One investor, Alpha Binwani Capital founder Ashwin Binwani, resumed buying the dollar against the yen at around JPY157, effectively betting on further weakness in the Japanese currency.
The trade remains attractive because Japan’s policy rate is just 1%, leaving a substantial yield differential with other major economies. Fiscal concerns are also adding to pressure on the yen. Against some higher-yielding currencies, including the Colombian peso, Turkish lira and Norwegian krone, yen-funded short positions have generated returns of more than 10% this year.
State Street’s Tokyo branch manager Bart Wakabayashi said the firm’s proprietary data show real-money investors continuing to hold carry positions against a range of Group-of-10 currencies. The Australian dollar is the most popular counterpart, followed by the euro, US dollar, Canadian dollar and pound.
JPMorgan Private Bank’s Asia head of rates and foreign-exchange strategy, Yuxuan Tang, said another move towards JPY162 per dollar was possible if the dollar and US Treasury yields do not weaken materially.
That would put traders on a collision course with Japanese policymakers. Tokyo is estimated to have spent about $34bn supporting the yen on 31 July, following an estimated $53bn operation the previous day. If confirmed, the latter would represent Japan’s largest single-day currency intervention on record.
US Treasury Secretary Scott Bessent has backed efforts to stabilise the yen, warning that weakness in the Japanese currency could contribute to broader depreciation across Asian markets.
The intervention is also influencing Japanese investors. Preliminary Ministry of Finance figures showed Japanese investors bought the largest volume of foreign assets in more than two years last week, taking advantage of the stronger yen following the authorities’ intervention.
The prospect of further official action, however, makes the carry trade more vulnerable. Another intervention or a faster-than-expected tightening cycle from the Bank of Japan could trigger a rapid unwind of short-yen positions, potentially magnifying volatility across currency and other markets.
The Japanese government is reportedly supportive of bringing forward the next BOJ rate increase, potentially as soon as September or October. Markets are currently pricing in one quarter-point hike by October, although even such a move would leave Japanese borrowing costs well below those in the US.
