Yen's Fortunes Shift as Traders Rethink Bets Against Japanese Currency

The yen's fortunes are shifting as factors combine to spook short sellers who have long bet against Japan's currency.

A recent reversal in market psychology has investors growing increasingly hesitant to aggressively short the yen, especially with the Bank of Japan expected to raise its key rate by 25 basis points this month. The BOJ may even consider a 50-basis-point hike or rapid increases in coming months, although this is seen as unlikely.

Data from Citigroup shows positioning on the yen has flipped from bearish to bullish since August, with interbank flow data indicating leveraged funds, banks, and real-money investors are all net buying yen. The yen is set for a 2.3% surge against the greenback this week, its largest gain in weeks.

Stephen Jen, CEO of Eurizon SLJ Asset Management, warns that the risk of a rapid unwind of yen-based carry trades is rising. 'When a currency is so extremely undervalued and positioning is so extended, movements like this will occur increasingly frequently before a big move,' he said.