Tokyo and Washington are sending a clear signal that the battered Japanese yen may finally be turning the corner. Six weeks after slipping to a 40‑year low against the U.S. dollar, the currency is now poised for a 2.3% rise this week, the strongest surge since the joint U.S.–Japan intervention at the end of July.
Changing Market Psychology
Rong Ren Goh, a fixed‑income portfolio manager at Eastspring Investments, told Reuters that investors are growing hesitant to continue shorting the yen. “The market psychology around the yen appears to be changing,” he said, noting that a possible Bank of Japan (BOJ) rate hike in September adds a new layer of risk for short sellers.
The BOJ is expected to lift its key rate by 25 basis points this month, but market participants are also entertaining the prospect of a 50‑basis‑point increase or a series of rapid hikes in the months ahead. While a 50‑bp move remains unlikely under Governor Kazuo Ueda’s cautious leadership, the mere possibility is enough to shift positioning.
Money Flows Support the Rally
Citigroup data show that yen positioning has flipped from bearish to bullish since early August. Leveraged funds, banks and real‑money investors are all net buying yen this week, according to interbank flow statistics.
Stephen Jen, CEO and co‑CIO of Eurizon SLJ Asset Management, warned that an extremely undervalued currency with extended positioning can trigger frequent moves, likening the dynamics to “earthquakes” where tectonic plates grind against each other.
Policy Moves and International Pressure
Japan’s fiscal concerns grew this year amid stimulus proposals from Prime Minister Sanae Takaichi and criticism that the BOJ was lagging behind in tightening policy. Tokyo launched record solo intervention in April‑May when the yen fell past the 160 per dollar mark.
In July‑August, the United States joined Japan in a rare coordinated intervention after the yen slipped to 163.99, a level not seen since 1986. U.S. Treasury Secretary Scott Bessent has long argued that higher U.S. rates are the proper remedy for a weak yen, and he pressed the BOJ during a recent G20 finance chiefs meeting.
BOJ board member Hajime Takata, the sole dissenter to a July decision to keep rates steady, raised the specter of 50‑bp moves or quicker successive hikes. Traders see his comments as potentially “game‑changing” for the yen.
Domestic Capital Repatriation
Japanese institutional investors are beginning to pull money back home. The $1.8 trillion Government Pension Investment Fund hinted at a pivot toward domestic assets, and official data show Japanese investors shedding foreign bonds at the fastest pace in four years.
Bart Wakabayashi of State Street in Tokyo noted that the biggest driver of the yen’s rise is the growing willingness of Japanese investors to reinvest domestically, including liquidating overseas holdings.
U.S. Rate Outlook and Carry‑Trade Unwind
Federal Reserve expectations have softened after dovish remarks from Governor Christopher Waller, giving the BOJ a chance to narrow the rate gap that has long weighed on the yen. As the advantage of overseas rates shrinks, the classic yen‑based carry trade—borrowing cheap yen to invest elsewhere—faces unwinding.
J.P. Morgan estimates that short positions on the yen have amassed to roughly 17 trillion yen (about $108 billion) since Prime Minister Takaichi took office. If those bets were fully reversed, the USD/JPY pair could fall into the 142‑146 range.
Outlook
With the BOJ’s policy path, capital repatriation, and coordinated international pressure converging, the yen’s recent rally appears rooted in solid fundamentals rather than fleeting speculation. Market participants will watch closely for any decisive BOJ move in September, which could cement the yen’s recovery or trigger further volatility.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
