Hedge Funds Flip to Bullish Yen Stance for First Time in 14 Months

Hedge funds have turned bullish on the Japanese yen for the first time in over a year, unwinding their bearish bets and establishing a net long position, according to data from the U.S. Commodity Futures Trading Commission (CFTC). The report showed that for the week ending September 15, leveraged funds held a net long position of approximately ¥251 billion ($1.6 billion), marking the first time they have favored a stronger yen since July 2025.

A Challenging Turnaround

This significant shift in positioning occurred just before key interest rate decisions from the U.S. Federal Reserve and the Bank of Japan (BOJ). While the Fed delivered an expected 25-basis-point hike, the BOJ raised its policy rate to 1.25%, a 31-year high. However, comments from BOJ Governor Kazuo Ueda, which stopped short of signaling an imminent further hike, disappointed some market participants hoping for a more hawkish stance.

This initially put the new bullish yen positions under pressure. On Friday, the yen weakened sharply, with the USD/JPY exchange rate briefly rising above 158. The currency then staged a dramatic reversal, strengthening by more than one yen in an hour, after reports surfaced that the BOJ had conducted a "rate check"—a move widely seen as a precursor to direct market intervention.

Intervention Shadow Looms

The threat of official intervention is a critical factor for yen traders. This summer, the yen fell to a multi-decade low near 164 per dollar, prompting joint intervention by U.S. and Japanese authorities. According to Japan's Ministry of Finance, authorities spent a record ¥15.4 trillion (approx. $96.4 billion) between July 30 and August 26 to support the currency.

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Analysts interpreted Friday's rate check as another warning to speculators against pushing the yen weaker, particularly as it approaches the 160 level. The backdrop is a historically large build-up in the yen "carry trade," where investors borrow in the low-yielding yen to invest in higher-yielding assets elsewhere. According to a Jefferies analysis of BIS data, cross-border yen borrowing reached a record ¥360 trillion ($2.35 trillion) as of March, creating a vulnerability to a sudden reversal.

Strategists Divided on Yen's Path

Market strategists remain divided on the yen's short-term trajectory. Some, like Chris Turner at ING, argued that without clearer signals of further rate hikes from the BOJ, the yen could weaken toward the 157-158 level against the dollar. The substantial interest rate differential between the U.S. and Japan, currently at 250-275 basis points, continues to support the carry trade.

Others, such as Jiwook Choi at State Street, maintain a bullish outlook, forecasting further BOJ rate hikes and a stronger yen, with a three-month target of 152.5 for USD/JPY. A longer-term structural shift may also be underway, as rising domestic interest rates could reduce the incentive for Japanese institutional investors to deploy capital abroad, potentially leading to a gradual repatriation of funds and supporting the yen.