By Rae Wee and Ankur Banerjee
SINGAPORE (Reuters) -Investors laid a record wager on Japan’s yen rising to take advantage of a long-overdue economic revival that coincided with expectations for a U.S. slowdown.
Instead, what’s unfolded is a cautionary tale of the Trump era.
The yen is struggling at nine-month lows and speculators are back-pedalling from their biggest bet on the currency in records stretching back almost four decades.
They have been wrong-footed by a U.S. economy surprisingly resilient to trade shocks, where policymakers have cooled on further interest rate cuts, and by a new government in Japan that has shown preference for the central bank to keep a lid on rate rises.
The unravelling of such a popular bet underscores just how thoroughly markets have defied expectations over the first eleven months of U.S. President Donald Trump’s second term in office.
It also shows how stubbornly weak Japan’s currency is proving and, for investors, it has been an expensive misstep, since holding yen – which yields hardly anything – means foregoing income available in other investments.
“There was a lot of expected interest rate convergence between the U.S. and Japan, and that’s probably not playing out as smoothly or as expected,” said Bart Wakabayashi, branch manager at State Street in Tokyo where investors have dialled bullish yen bets all the way back to neutral over the past seven months.
The yen drew hints at official intervention from Japan when it hit a nine-month low of 155.05 to the dollar this week and many in the market think sideways or lower will be the next move for a currency that has been on the back foot for nearly five years.
“We are on the sidelines now…but more inclined towards a weaker yen camp,” said Vaibhav Loomba, head of FX and rates at financial services firm Klay Group in Singapore.
“This is a market for lack of conviction trades.”
THE TAKAICHI-TRUMP FACTOR
Much of the yen’s weakness can be linked to the Bank of Japan’s caution in raising rates, which has in part been a response to the uncertainty unleashed by U.S. tariffs.
More recently, Sanae Takaichi, who assumed office as prime minister in late October, has thrown some political pressure into the mix as she prefers to keep interest rates low while her administration ramps up spending to boost growth.
“While her room for manoeuvre is very limited, the direction of travel is definitely less yen positive,” said James Athey, a fixed income portfolio manager at Marlborough in London.
“Meanwhile the BOJ continues to shoegaze, paralysed by fear and historical precedent.”
Japan has wrestled with deflation for decades and made its first interest rate hike in 17 years in 2024, but has moved the policy rate only to 0.5% lest the economic revival be snuffed out.
Markets are now simultaneously dialling back bets on both U.S. interest rate cuts and Japanese interest rate hikes in the future, leaving a gap of more than 300 basis points between policy rates and the Japanese currency vulnerable to further losses.
“We are actually thinking that dollar/yen can further go higher,” said Chandresh Jain, emerging market Asia rates and FX strategist at BNP Paribas, who is using options to bet the yen can weaken past 155 per dollar in the next few weeks.
CARRY ON
The U.S. government shutdown had halted the collection of public positioning data since September so it’s not clear if the market has flipped to a net short yen position, but that’s the direction of travel.
The most recently available figures, from late September, showed longs had more than halved since hitting a record in April.
Options pricing also suggests that Jain’s position is becoming more popular.
The three-month dollar/yen implied volatility, a measure of the cost of options contracts, has fallen to its lowest in over a year, reflecting low demand for protection against yen strength.
“Speculative yen short positioning does not appear large at this stage, and we see room for short positions to build from here,” said Hirofumi Suzuki, chief FX strategist at SMBC.
To be sure, Japanese rates do seem to be heading higher and U.S. rates lower, a fundamental shift that has a few brave investors keeping faith in the yen.
But with broader financial markets in an expansive mood and volatility low, it’s “really time for many investors to focus on carry,” according to Yujiro Goto, head of FX strategy for Japan at Nomura, a strategy of profiting from interest rate gaps.
That means selling yen.
“Our year-end forecast (for dollar/yen) remains at 155 but the risk of an overshoot to 160 in 4Q25 has risen,” said Shusuke Yamada, Bank of America’s FX and rates strategist.
(Reporting by Rae Wee and Ankur Banerjee; Editing by Tom Westbrook and Shri Navaratnam)
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