Hedge Funds Turn Deeply Bearish on the Yen Again

Source: Coindoo Original Title: Hedge Funds Turn Deeply Bearish on the Yen Again Original Link: https://coindoo.com/hedge-funds-turn-deeply-bearish-on-the-yen-again/ Speculative pressure on the Japanese yen is intensifying as hedge funds build one of their most aggressive bearish positions in months.

Recent positioning data shows leveraged funds holding roughly 85,000 net short contracts on the yen in the week ending December 14, marking the second-highest bearish reading since mid-2024.

Key Takeaways

• Hedge funds are holding one of their largest net short positions on the yen since mid-2024.
• The US-Japan rate gap remains a major drag despite Bank of Japan tightening.
• Negative real yields continue to discourage demand for yen assets.

This comes immediately after an even heavier short buildup the prior week, when net short exposure briefly climbed above 90,000 contracts. Together, the back-to-back readings signal growing conviction among macro-focused funds that the yen remains vulnerable.

Rate Differentials Keep the Yen on the Back Foot

The main driver behind the renewed pessimism is the persistent gap between US and Japanese interest rates. Despite incremental tightening steps by the Bank of Japan, the yield advantage still firmly favors the US, with the spread hovering near three percentage points.

That gap continues to limit the yen’s appeal, especially in carry trades, where investors borrow in low-yielding currencies and deploy capital into higher-return markets. As long as this imbalance persists, rallies in the yen are likely to be met with renewed selling.

Negative Real Yields Undermine Investor Confidence

Another structural headwind comes from Japan’s deeply negative real interest rates. Inflation has remained above policy rates, eroding the purchasing power of yen-denominated assets and discouraging long-term capital inflows.

For global investors, this dynamic reinforces the view that holding yen offers little protection against inflation, particularly when alternatives in other major economies provide positive real yields.

Intervention Risk Returns as USD/JPY Climbs

The latest positioning echoes conditions seen earlier in 2024, when extreme bearish bets coincided with USD/JPY pushing beyond the 160 level. That move ultimately triggered currency intervention by Japan’s Ministry of Finance in an attempt to stabilize the market.

With speculative shorts once again approaching elevated territory, traders are increasingly alert to the risk of official action if volatility accelerates. While intervention can slow momentum, history shows it rarely reverses trends unless supported by policy shifts.

Yen Pressure Builds Into Year-End

The combination of aggressive hedge fund positioning, unfavorable rate dynamics, and weak real yields suggests the yen remains under sustained pressure heading into the new year. Unless the policy outlook shifts meaningfully, the currency may continue to trade defensively, with downside risks outweighing short-term relief rallies.