Hedge funds turned bearish on the yen in the week leading up to Japan’s snap general election, as the ruling Liberal Democratic Party failed to secure a majority, potentially amplifying currency risks, according to a report by Bloomberg.
The report cites data from the Commodity Futures Trading Commission for the week ending 22 October as showing that speculative investors flipped to a net short position on the yen for the first time this month. This shift came just ahead of the election results, which have raised new challenges for Prime Minister Shigeru Ishiba to form a stable government and cast uncertainty on his political future.
With the yen already near its lowest levels since late July, Japan’s currency is now more vulnerable to political instability. Prime Minister Ishiba, previously seen as favouring a tighter policy stance, unsettled markets by recently suggesting Japan’s economy wasn’t prepared for further rate hikes. Now, traders are watching both Japanese political dynamics and the upcoming US election for cues to potentially extend their bearish positions on the yen.
Referencing a strategy that involves borrowing yen to invest in higher-yielding assets the report cites Shoki Omori, Chief Desk Strategist at Mizuho Securities, as saying: “If the government remains unstable, it will be easy for carry traders, including hedge funds, to sell the yen.”
The currency slid as much as 0.6% to 153.27 per dollar in early Monday trading, marking its weakest point in nearly three months. The drop could spur intervention from Japanese authorities, though investors are cautious about the election’s impact on Japan’s legislative process, which may dampen the yen’s appeal further.
Asset managers mirrored the bearish sentiment, switching to a net short of 17,226 yen contracts as of October 22—their first since mid-August, according to CFTC data.
