Japanese Capital Repatriation Stalls Amid Uncertainty on Bond Yields

The repatriation of Japanese capital from abroad has begun but is being slowed by uncertainty over where Japanese bond yields will peak and how much further interest rates must rise. The Bank of Japan's recent rate hike, pledges to tackle inflation, and a reported rate check in the foreign exchange market have likely warded off another speculative bet against the currency.

However, major investors remain reluctant to commit heavily to domestic bonds due to climbing yields and unclear guidance from policymakers. This caution is capping the scope for a sustained yen rally with potentially far-reaching effects across global markets.

According to Shoki Omori of Deutsche Bank in Tokyo, 'The fast-money carry trade has already been unwound; the slow-money one has not started.' He notes that Japanese pensions and households holding overseas assets unhedged are still a significant factor, and for the yen, this means the era of relentless declines may be over but a durable strengthening trend has yet to begin.

The yen has lost most of its sharp gains from early September and traded near 159 per dollar on Friday, not far from the 157 level, which is the median six-month projection of analysts polled by Reuters earlier this month. Short sellers have retreated in tandem with the price, with speculative positioning in the yen flipping from a deep net short to the largest net long since July 2025 at $9.7 billion in just the first two weeks of September.