Yen Strengthens on BOJ Rate Hike Bets and Fund Flows

The Japanese yen has been gaining strength after hitting a four-decade low against the US dollar in June. Several factors are putting pressure on traders who have bet against the yen for years.

A combination of higher central bank interest rates, large-scale foreign exchange interventions, and fund flows back into Japan is changing the outlook for the yen. Rong Ren Goh, Fixed Income Portfolio Manager at Eastspring Investments, said investors were becoming increasingly reluctant to aggressively short the yen as the Bank of Japan (BOJ) prepares to raise its benchmark interest rate by 25 basis points this month.

The BOJ is expected to hike rates in September, but markets are also pricing in a possibility of a 50-basis-point increase or multiple hikes in quick succession. A 50-basis-point rate hike is still considered unlikely, given BOJ Governor Kazuo Ueda's cautious approach to monetary policy.

Citigroup data showed that investor positioning on the yen has shifted from bearish to bullish since early August, and interbank transaction flow data revealed that banks, funds, and institutional investors have become net buyers of the yen this week. The Japanese currency is expected to strengthen 2.3% against the US dollar this week.