Yen Bearishness Hits Post-2022 Extreme on Policy Concerns, BofA Survey Finds

Investor pessimism toward the Japanese yen has intensified to its highest level since 2022, driven primarily by mounting concerns over the country's monetary and fiscal policies. The findings, from Bank of America Global Research's July FX and Rates Sentiment Survey, show these policy risks now outweigh the persistent threat of official currency intervention from Tokyo.

Policy Doubts Outweigh Intervention Risk

According to the BofA survey, respondents overwhelmingly cited risks from the Bank of Japan (BoJ) and the government's fiscal stance as the main reason for expecting further yen weakness. This sentiment comes as the U.S. dollar trades against the yen near levels last seen in 1986, keeping markets on high alert for intervention.

While fears of official action have kept overall investor positioning only modestly bearish, the survey noted that conviction is low. Policy concerns have eclipsed other factors, such as narrowing interest-rate differentials or valuation, as the primary driver for the negative outlook on the currency.

Speculators Build Record Short Positions

Despite caution among the broader market, speculative traders have taken a more aggressive stance. BofA highlighted data from the Commodity Futures Trading Commission (CFTC) showing that leveraged funds are holding their largest net short yen positions since 2007.

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This extreme positioning underscores how heavily a segment of the market is betting against the yen. BofA analysts suggest that the risk of intervention has likely been the only factor preventing speculative short positions from becoming even larger.

Central Bank Divergence Remains Key

The bearish view on the yen is rooted in the wide interest-rate gap between a hawkish U.S. Federal Reserve and a still-accommodative Bank of Japan. Investors remain skeptical that the BoJ will tighten policy fast enough to provide meaningful support for the currency.

Interestingly, the BofA survey also found that respondents now view the BoJ as the major central bank most likely to deliver more rate hikes than markets currently anticipate. However, the consensus remains that Japan's policy normalization will significantly lag that of its peers. All eyes are now on the BoJ's next policy meeting on July 30-31 for any change in guidance.