Hedge Funds Turn Bullish on Yen for First Time in 14 Months, Spotlight on Carry Trade Reversal

Shift in Yen Positioning

According to data released by the U.S. Commodity Futures Trading Commission (CFTC) on Friday, hedge funds cleared their short positions against the yen during the week ending September 15 and began building long positions betting on yen appreciation. This marks the first time since July 2025 that leveraged funds have turned net bullish on the yen, representing a notable shift in sentiment weeks after coordinated intervention by U.S. and Japanese authorities in the foreign exchange market.

These funds currently hold approximately ¥251 billion ($1.6 billion) in net long positions on the yen.

The same CFTC data also showed that as of September 15, speculative traders—including asset managers and non-commercial participants—reduced their overall bullish bets on the dollar to the lowest level since March, even though the dollar recorded its largest weekly gain in three months this week.

Shift in Sentiment Following Intervention

This turn toward bullishness followed joint buying of the yen by U.S. and Japanese authorities from late July through late August. The yen had fallen to around 164 per dollar earlier this summer, its weakest level since 1986.

On August 3, Japanese Finance Minister Satsuki Katayama and U.S. Treasury Secretary Scott Bessent confirmed the joint intervention effort. According to Ministry of Finance data, authorities deployed ¥15.4 trillion (approximately $96.4 billion) between July 30 and August 26 to support the yen, setting a record for monthly intervention. Notably, the actions on July 30 and 31 marked the first joint U.S.-Japan intervention since 1998.

Despite these efforts, the yen fell below 160 again on August 31. By Friday's New York close, it was quoted at 156.88.

Background: Historically Large Yen Shorts

Another backdrop to this shift is the historically large accumulation of yen shorts. According to Jefferies' analysis of Bank for International Settlements (BIS) data, cross-border yen borrowing—a hallmark of carry trades—had surged to a record ¥360 trillion ($2.35 trillion) by March this year.

Charu Chanana, Chief Investment Strategist at Saxo Bank, previously warned that such positions are "fragile," noting that further yen strength could transform gradual deleveraging into faster, self-reinforcing unwinding.

Hedge funds turned bullish just before central bank meetings this week—and subsequent developments quickly posed challenges to these new positions.

Central Bank Week: Rate Hikes Materialize, Signals Remain Dovish

The Federal Reserve raised interest rates by 25 basis points this week, lifting the federal funds target range to 3.75%–4.00%. Subsequently, the Bank of Japan (BOJ) increased its policy rate from 1.0% to 1.25%, hitting a 31-year high. This hike came only three months after the June increase, marking the shortest interval between rate hikes since 1990.

The decision passed with a 7-2 vote, with two newly appointed members under the Takaichi administration dissenting. BOJ Governor Kazuo Ueda stated at a press conference that Japanese monetary policy has "entered a new phase." When asked about the possibility of hiking more than 25 basis points at once, he said, "Depending on price developments, various possibilities exist," but did not explicitly hint at another hike in October.

Surveys indicate that markets broadly expect the policy rate to rise to 1.5% by the end of March 2027 and further to 1.75% in the second quarter. The signals sent by the BOJ disappointed some market participants who hoped for a clearer path of continuous rate hikes, exposing newly bullish traders to the risk of being caught off guard.

Divergent Strategist Views

Strategists remain divided on the yen's short-term direction:

• Chidu Narayanan, strategist at Wells Fargo, believes the threshold for the BOJ to meet or exceed hawkish market expectations is high, recommending shorting the yen.
• Chris Turner, Head of G10 FX Strategy at ING, previously estimated that if the BOJ fails to signal further hikes, the yen could weaken to 157–158 against the dollar.
• Jisoo Choi, Head of Asia-Pacific Macro Strategy at State Street, holds a bullish view, expecting the BOJ to continue raising rates in December and next March, ultimately reaching 1.75%, with a three-month USD/JPY target of 152.5.

V-Shaped Reversal and Intervention Warnings

During Friday's New York session, the yen briefly fell 1.3% against the dollar. USD/JPY rose above 158 during European trading hours, reaching a two-week high. Reports then emerged that the BOJ had conducted "rate checks" with market participants—an action typically viewed as a precursor to official intervention. Within an hour, the yen appreciated more than one full unit against the dollar, pushing USD/JPY back from near 158 to the upper 156 range, closing near 156.80 in New York.

Institutional interpretations of these rate checks were largely consistent. Alex Cohen, FX strategist at Bank of America, told Wallstreetcn that despite the BOJ's rate hike, the yen remained significantly weaker; "today's rate check serves as another warning to the market," reflecting the Ministry of Finance's willingness to deploy substantial foreign reserves for intervention.

Analysis suggests such measures make traders think twice before chasing yen depreciation, "especially when exchange rates approach 160." Additionally, Japan is entering a holiday period, where lower trading volumes may amplify the impact of official actions on exchange rates, making the current window particularly sensitive for markets.

CFTC positioning data provides investors with a window into tracking derivative positions held by hedge funds and asset managers in the foreign exchange market, which averages $9.5 trillion in daily turnover.

Carry Trades: Will There Be Another Reversal?

All discussions regarding yen positions ultimately converge on one question: will carry trades experience another concentrated unwind? The reference point is August 2024, when a combination of BOJ rate hikes and weakening U.S. employment data triggered a sharp yen rally, leading to cascading unwinds of carry trade positions and significant volatility in global risk assets.

According to estimates by China International Capital Corporation (CICC), hedge funds' net short positions in the yen rebounded to approximately 110,000 contracts on September 2 but fell to around 50,000 by September 9, dropping more than half from recent highs. Based on this, CICC judges that the overall scale of carry trades has notably contracted, suggesting that "the likelihood of a reversal remains relatively limited."

However, the fundamental drivers supporting carry trades have not disappeared:

• An absolute interest rate differential of 250–275 basis points persists between U.S. and Japanese benchmark rates.
• As long as there is no substantive adjustment in the policy stances of both central banks, the foundation for yen-based carry trades will remain intact.
• International financial markets may continue seeking opportunities to short the yen.

Analysts also caution that a collapse-style decline in the yen would push up Japanese government bond yields, force carry trade unwinds, and directly shock U.S. Treasury and equity markets—explaining why U.S. and Japanese authorities have limited tolerance for disorderly currency movements.

Longer-Term Structural Impacts

Longer-term impacts lie at the structural level. As Japanese policy rates and government bond yields continue to rise, the cost advantage of using the yen as a funding currency will gradually diminish. The incentive for Japanese insurers, pension funds, and banks to keep increasing allocations to overseas assets may weaken. The result is likely to manifest as marginal contraction in yen-funded borrowing and slower growth in new overseas allocations, thereby marginally elevating global funding costs and the long-term interest rate center.

Capital is already flowing back:

• As of August 22, Japanese investors had net sold approximately ¥3 trillion in overseas bonds this year, the largest amount for the same period since 2022.
• According to a JPMorgan survey of 82 Japanese corporate pension funds, the net percentage planning to increase holdings of domestic bonds reached its highest level since 2008.