Yen Short Bets Jump to Nine-Year High as Carry Trade Revives

Speculators have boosted their bets against the yen to a nine-year high, signaling the revival of the yen carry trade despite intervention risks and a potential rate hike by the Bank of Japan on Tuesday.

Leveraged funds increased their bearish positions on the yen to over 115,000 contracts in the week through June 9 — the highest level since November 2017, according to Commodity Futures Trading Commission data. That comes as the yen hovers near the 160-per-dollar level, putting traders on alert for government intervention.

The so-called yen carry trade, which involves borrowing in the relatively low-yielding Japanese currency and investing in other currencies offering higher returns, is thriving again partly because global market volatility has remained relatively subdued. The yen has also trended lower, defying the BOJ’s gradual rate hikes and taking Tokyo’s currency interventions in its stride as the interest rate gap with the US persists.

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The BOJ’s potential rate hike and FX support are “already substantially priced in ” by the market at this point, whereas both moves were surprises two years ago, JPMorgan Chase & Co. strategists including Junya Tanase wrote in a note. Many investors view intervention-driven yen strength as an opportunity to sell, as evidenced by the April-May intervention, which saw short yen positions briefly shrink before quickly rebuilding and returning to pre-intervention levels, they said.

Still, the yen carry trade isn’t without risks. It in 2024, when the BOJ raised rates and unveiled plans to halve bond purchases, triggering a sharp rebound in the yen that forced investors to rapidly unwind leveraged positions and sent shockwaves through global currency and equity markets.