Yen Rebound Underway as Wall Street Bets on Fundamental Shift

Wall Street analysts believe the yen's prolonged slide is reversing course after years of weakness. The recent strength in the Japanese currency may be more than a short-term bounce, it could mark the start of an unwinding of undervaluation.

According to Michael Nizard, head of multi-asset and overlay at Edmond de Rothschild Asset Management, the yen has begun moving on its own fundamentals rather than on the U.S.-Japan interest rate gap or its role as a funding currency for global carry trades. Nizard wrote in a recent report that 'the yen may have started trading again as a genuine fundamental currency,' and that every correction in the yen should be seen as an opportunity to rebuild or expand long yen positions.

The yen has gained more than 3% this month, with expectations that the Bank of Japan will accelerate its rate increases and Japanese pension funds shifting more money into domestic assets prompting investors who had bet against the currency to unwind their positions. U.S. Treasury Secretary Scott Bessent's public support for a stronger yen added further momentum.

Nizard expects these shifts to ultimately reduce the degree to which global financial markets depend on cheap yen funding. Joint U.S.-Japan intervention in the currency market was also read as a signal that the yen's direction is changing, with markets 'no longer assuming that yen depreciation will be tolerated indefinitely.'